uCloudlink Group Inc. (NASDAQ:UCL) Q4 2022 Earnings Call Transcript

uCloudlink Group Inc. (NASDAQ:UCL) Q4 2022 Earnings Call Transcript March 15, 2023

Operator: Good morning, and welcome to the uCloudlink Group Inc. Fourth Quarter and Full Year 2022 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 of Investor Relations. Please go ahead.

Jillian Zeng: Thanks, everyone for joining us on our fourth quarter and full year 2022 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. Zhiping Peng is our Co-Founder and Chairman of 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, Chaohui Chen will begin with an overview of the company’s recent business highlights and uCloudlink’s 2023 business outlook, which will cover the earnings presentation posted on our IR website. Our CFO, Yimeng Shi, 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 the 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 measures. I will now turn the call over to our Co-Founder and CEO, Mr. Chaohui Chen. Please go ahead.

Chaohui Chen: Thank you, Jillian and good morning, everyone. Thank you for joining us on our year-end 2022 earnings call today. We appreciate everyone’s time. Year 2022 was truly a period/year for uCloudlink characterized by achieving great success and overcoming tremendous challenges. We are pleased to have achieved positive operating cash flow of US$4.4 million for the year-end December 31, 2022, a significant milestone for our company. As this is the first time we have done since the COVID-19 pandemic. Having overcome the difficulty we faced during the COVID-19 pandemic and working to strengthen the diversity of our business as well as increasing its resilience with new growth opportunities. We are excited about the company’s long-term growth prospects, and believe we are well positioned to be an industry leader.

uCloudlink 1.0 is our international data connectivity services business, which tends to be a higher margin lines of business, and the one, which we believe will continue to be a key growth driver for the company. During the fourth quarter of year 2022, uCloudlink 1.0 business, revenues increased 48.2% year-over-year to US$7.7 million. For 2022, uCloudlink 1.0 business revenues increased 29.6% year-over-year to US$28.1 million. This improvement is a reflection of international traveler recovering across our major markets over the course of the year. This was accompanied by an increase in average daily active terminals for uCloudlink 1.0 business during the fourth quarter and full year, year 2022. Average daily active terminal increased 20.5% year-over-year in 2022.

In 2022, we have become a leading 5G roaming solution provider in the wireless network industry and have continued to provide reliable and high-quality international data connectivity services in more than 140 countries enabling single operator entry point to assess more than 300 global mobile network operators available networks. uCloudlink 2.0 is our local data connectivity services business, which has been a significant driver of revenue growth since year 2020. Over the past two years, we have continued to strengthen our presence in market like Japan, North America, Southeast Asia, where we have €“ where we help operators and business partners improve their data connectivity services and resolve data connection problems through our PaaS and SaaS platform based on our patent technology including processing and HyperConn technology solutions.

Our uCloudlink 2.0 business report US$7.4 million in revenues, up 55.5% in year 2022 from US$4.7 million in year 2021. On the Internet of Things, IoT side, our customers were able to realize reduced operating costs and improve data connectivity experience through this cutting-edge IoT solutions, and we continue to explore opportunities where we can broaden the applications of our technologies for partners with IoT needs. Covering application scenario like a WiFi router, IP camera and electric vehicles. We continue working to close our uCloudlink 1.0 business, strengthening our leading global position in the international data roaming solutions market since the beginning of year 2023. We have observed an accelerated recovery in international travel.

The United Nations World Travel Organization expects 2023 international tourist arrival number will recover about 80% to 95% of pre-pandemic levels, which presents a significant opportunity for us. Following China, moving away from zero-COVID-19 policy and the subsequent opening of the national borders, we act quickly to establish and provide a data solution coverage at many of our partner, airports, airlines and travel agents allowing us to meet the recovering demand for uCloudlink 1.0 Roamingman business in China, Malaysia and Singapore. We believe the improving macro environment represent a greater upside for uCloudlink 1.0 business in year 2023. And we will continue spending our leading position as a 5G roaming solution provider and launch uCloudlink 1.0 products and solutions such as the eSIM solutions to satisfy the various needs of our customers and users in multi industries.

For the uCloudlink 2.0 business, we have gained more industry recognition and have continued to expand our PaaS and SaaS platform ecosystem. While continuing to establish a nature customer relationship for a uCloudlink 2.0 business in existing key markets like Japan and North America. We have gotten more industry recognition in China, which is expected to accelerate uCloudlink 2.0 business growth. In January year 2023, our Wireless Multi-Network Intelligent Connection Engineering Technology Research Center was approved as one of the Guangdong Province Engineering Technology Research Centers by the Department of Science and Technology of Guangdong Province. We believe this recognition serves as a testament to our continued technology advancement in mobile and data connectivity technologies and brings a new momentum for uCloudlink to expand our presence in the Mainland, China market and beyond.

In the IoT side, the company continues to serve existing partners with our superior, more reliable mobile network solutions. While proactively exploring opportunities in new industries and new application scenario including augmented reality, AR, and virtual reality, VR electric vehicles, et cetera. We expect to meet a breakthrough in Japan market where we have a strong presence, helping business partners to further improve their data connectivity experience in the IoT field. We remain on check in the long-term development of our PaaS and SaaS platform ecosystem, which we believe is key to the success of our mobile data sharing marketplace. With that, I would like to touch on uCloudlink near-term initiative. uCloudlink 3.0 to initiative a mobile data traffic sharing marketplace application based on our efforts in building a scalable user base through our uCloudlink 1.0 and 2.0 models.

This marketplace enables and users device to connect to any available network anytime and anywhere utilizing the Global GlocalMe app. The GlocalMe app is designed to support various application scenario without a limitation of the device, including top up and go GlocalMe terminals, active and go eSIM, GlocalMe data application only solution, GlocalMe SIM, GlocalMe Inside the third party device, mobile Wi-Fi rental, et cetera backed by our CloudSIM, HyperConn and web 2.0 technologies. We aim to build a data traffic marketplace for operators, customers, and users where data traffic can be shared simply and efficiently via day-to-day market behavior. Once this marketplace application launch near future, we expect to continue to make investments into optimizing the system on an ongoing basis, operating more state-of-the-art technologies such a blockchain technology.

We are committed to continuous development of innovative solutions and plan to expand our CloudSIM and HyperConn technology solutions to various application scenario, including media, video conference, also live broadcasting, et cetera. Based on these innovative CloudSIM and HyperConn technology solutions, we expect to launch more innovative product covering the need €“ to the need of diverse set of enterprise and individual customers in year 2023. Once of which €“ once that data connectivity solutions application, I mentioned earlier, the GlocalMe app on various smart hardware supporting various type of things. Finally, I will briefly discuss guidance for the year 2023. For 2023, we expect total revenues up between US$85 million, and US$100 million representing an increase of 19% to 40.1% compared to year 2022.

We expect to build a more solid financial and operational position to see better results in the future. We are pleased with our achievements in 2022 and I would like to extend a heartfelt thank you to all the uCloudlink team members for their efforts and delegations to strengthening our company. We feel confidence in the opportunities and challenge ahead of us in 2023, leveraging our portfolio of advanced technology offerings and more mature commercial experience and look forward to continuing to serve our customers and partners throughout our global market. uCloudlink remains focus on scaling our user base and constantly improving the technology and business operation model to build a mobile data traffic sharing marketplace, which we build the company’s long-term growth.

I will now turn the call over to our CFO, Yimeng Shi.

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Yimeng Shi: Thank you, Mr. Chen. Hello, everyone. I will go over our operational and financial highlights for the fourth quarter and the full year of 2022. Average daily active terminal, DAT, is an important operating metrics for uCloudlink as a measure trend €“ customer usage trend for each of the period, which is a reflective of environments. In the fourth quarter of 2022, average daily active terminal were 297,884 of which 2,299 owned by the company and 295,585 owned by our business partners, up 12.2% from 265,595 in the fourth quarter of 2021. uCloudlink 2.0 service accounted for around 62.1% of the total DAT during the fourth quarter of 2022. Average daily data usage per terminal was 1.68 gigabytes in December 2022.

Total revenue for the fourth quarter of 2022 were US$19.6 million, representing an increase of 11.6% from US$17.6 million in the same period of 2021. Revenue from services in the fourth quarter of 2022 were US$12.5 million, an increase of 30.3% from US$9.6 million in the same period of 2021. Revenue from services as a percentage of total revenue was 63.9% during the fourth quarter of 2022, up from 54.8% during the same period of 2021. During the fourth quarter of 2022, Japan contributed approximately 43.7%. Mainland China contributed 3%, and other country and regions contributed 53.3% of total revenue, compared to 37.4%, 3.1% and 59.5%, respectively in the same period of 2021. Overall gross margin improved to 51.3% in the fourth quarter of 2022, compared to 31.0% in the same period of 2021.

And our gross margin on service increased to 59.4% in the fourth quarter of 2022, compared to 46.1% in the same period of 2021. Excluding share-based compensation our total operating expenses decreased to US$10.4 million, or 33% of total revenue. In the fourth quarter of 2022 compared to US$10.9 million or 62% of total revenue in the same period of 2021. As a result of a more favorable business mix and a significantly decreased operating expenses we report narrow net loss of US$1.1 million in the fourth quarter of 2022 compared to a net loss of US$15.5 million in the same period of 2021. Similarly adjusted EBITDA improved to US$1.6 million during the fourth quarter 2022, which compared to negative US$5.1 million in the same period as 2021. We were proud to have achieved positive operating cash flow of US$5.2 million during the fourth quarter of 2022, which compared to negative US$3.2 million during the same period of 2021.

Moving to 2022 financial result. Total revenue for 2022 were US$71.4 million, compared to US$73.8 million in 2021. The decrease was primarily due to decrease in sales of certain terminal and the data related products, partially offset by an increase in international and local data connectivity service. Revenue from service for 2022 were US$46.2 million, an increase of 22.3% from US$37.8 million for 2021. Revenue from service as a percentage of total revenue was 64.7% during 2022, up from 31.2% during 2021. In 2022 revenue from international data connectivity service were US$28.1 million and a local data connectivity services were US$7.4 million, increasing by 29.6% and 35.5% respectively year-over-year. This increase in revenues from data connectivity services was mainly attributable to the gradual recovery of international travel and the continuous development of the local data connectivity services.

Overall gross margin improved to 45.5% in 2022, compared to 29.6% in 2021. And our service gross margin increased to 56% in 2022 compared to 43% in 2021. The increase of service gross margins during 2022 was primarily attributable to a more favorable business mix, with a larger proportion of revenue coming from international data connectivity service, which tend to have higher gross margin. During 2022 we streamlined our business operations which led to significant reduced operating expenses. Excluding share-based compensation total operating expenses decreased to US$34.4 million or 48% of total revenue in 2022 compared to US$47.1 million or 64% of total revenue in 2021. In 2022 with significant delay net loss which was US$19.9 million compared to US$46 million in 2021.

Adjusted EBITDA negative US$2.3 million during 2022 compared to negative US$22.6 million in 2021. During 2022, our CapEx was US$0.4 million compared to US$0.9 million in 2021. For the full year 2022, we achieve positive operating cash flow of US$4.4 million compared to negative US$21.7 million during 2021. Move on to balance sheet item. Our cash and cash equivalent and short-term deposit increase to US$15.1 million at December 31, 2022, compared to US$8.1 million at December 31, 2021. We’re pleased to have stressing the company financial position over the course of 2022 and our well position to continue growing our business in near-term. With that operator let’s open it up for Q&A.

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Q&A Session

Operator: And our first question will come from Theodore O’Neill of Litchfield Hills Research. Please go ahead.

Theodore O’Neill: Thank you very much. My first question is about the gross profit. You’re showing improvement year-over-year and sequentially in gross profit margin, and I was wondering if you could give us some insight into why that’s improving so nicely here?

Yimeng Shi: Yes. Thanks Theo. Yes this is Yimeng Shi, I will give more colors on improvements gross profit €“ gross margins. Yes generally the improvements it came from a service mixture as we disclosed in this statement, and we have a more international connectivity service in our total service portion and the international connectivity service have a higher gross margins than locals connectivity service. And also in our service mix, we have a significant portions of PaaS and SaaS revenue, so this is the highest gross margin as well. So this and also we have in the past years and we have put offers on research and developments to control this data consumption usage. And also we can put the controls on commercial site and keep these commercials pricings on some stable levels.

So that’s the whole year give us improving gross margins compare with the year 2021 and the service gross margin is coming back to the history with whole years labors 2019 and the service group margins, let’s pick-up to a 59% overall in the whole year. We expect this trend for this higher gross margin for service. We will keep this trend in this year of 2023 as we expect the revenue portions from international connectivity service will increase materially, and we have this same trends compares with last year as well.

Theodore O’Neill: Thank you. And my next question is about the balance sheet. You’re showing a year-over-year large decline in accounts receivable. Can you explain what’s going on there?

Yimeng Shi: Yes. That’s correct, yes. In 2022, we put significant efforts on cash collections from the account receivable from the current year 2022 selling. And also, we put AFS on the agent’s account receivables backward from the years 2021 savings. So this account receivables, the balance accounts receivables decreasing significance because we put quite a lot of effort on cash collections from the customer side. So this year, we will also keep this same AFS on selling and to collect cash quickly from the customers’ side as well. And I think we have a good customer pools from the Japan’s market from the U.S. market as well. So this €“ the cash collections cycle is very important for us to have a quick cash inflow to support our operations and business growth. Thank you.

Theodore O’Neill: Thank you very much.

Operator: The next question comes from Vivian Zhang of Diamond Research. Please go ahead.

Vivian Zhang: Good morning. This is Vivian Zhang from Diamond Equity. Thanks for taking my questions and congrats on achievements you made last year. So my first question is that China lifted a zero-COVID policy and pandemic travel restrictions in December last year. It’s expected that international travel will further recover and rebound as well. So, how do you think this will affect your company’s business and your revenue in 2023 and beyond?

Chaohui Chen: Yes. I’m Chaohui Chen, CEO of uCloudlink. So yes, so we can see the whole world, including China to open the border. So, we can see a smaller rebound from the China spring festival to Chinese New Year. But I think the make €“ the fourth wave of rebound of the €“ from COVID-19, I think will be the Labor Day is in the May 1. This €“ May 1, we have the fourth wave of rebounds from the COVID-19. So the whole year, we think in China, because everything recovery needs some period. So including the passport, visa everything, they did already, we believe that this year may be in China, only 40 €“ around 40% recovery. And the next year, year 2014 , I think full recovery of that China will happen. So this year, around 40%.