uCloudlink Group Inc. (UCL) Earnings Call Transcript & Summary

Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to UCloudlink Group Inc. Fourth Quarter and Full Year 2021 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. I'd now like to turn the conference call over to your host today, Ms. Jillian Zeng, Investor Relations of the company. Please go ahead.

Thanks, everyone, for joining us on our fourth quarter and full year 2021 earnings call today. This earnings release is now available on our IR website at ir.ucloudlink.com, as well as via newswire service. I will give a brief introduction to our uCloudlink 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 President of the 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 financial results as presented in the Section 2 and 3. 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 on management's current expectations and observations that involve the 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 filings with the SEC. The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise except as required by law. Please also note that uCloudlink's earnings press release and this conference call include discussions of an 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.

Yes. Thank you. There are similar content as the earning presentation of the third quarter of year 2021. I will focus on our technology and recent developments. And let's move to Page 13. uCloudlink 1.0 is our international data connectivity services business, which has had a strong track record of high gross margins and profitability with ongoing growth potential. We have established an intelligent wholesale to retail repackaging solution to minimize unit cost of data traffic, in that as data package of single operator or across mobile network operators, mobile virtual operators are priced differently. These are -- this is attributable to our large SIM card pool and our ability to acquire data packages at local wholesale pricing from operators and partners. We further differentiate ourselves with our market network reselection and combination technologies, which could ensure high-quality data connectivity and improve user experience. uCloudlink 1.0 business monetization model includes retail to C, rental or selling to the end user; wholesale to B business partners; and our PaaS and SaaS services, such as CRM, billing management, devices, selling and rental management, et cetera. For wholesale to B, we can act as a reseller or provide commission services to our business partners. We allowed our business partners to share data traffic pools through our PaaS and SaaS platform and charge a commission fees. In year 2021, we strive to accelerate the recovery of our 1.0 business, which was reflected in the positive trends in the daily active terminals called DAT of 1.0 business growth, as the number of international travelers increased in various markets and our 1.0 business revenue increased in the third quarter of year 2021 year-over-year. The revenues of our 1.0 business in our North American and the Europe market increased during the first quarter of year 2021 year-over-year. Although the total revenues from the Mainland of the business experienced a year-over-year decrease in the same period due to the impact of the COVID-19 virus. Despite the impact the pandemic has had on our 1.0 business, it has also created opportunities for potential growth, including the demand for mobile data related to travel checking, destination records, digital platforms and the COVID test report. We also anticipate that we will see fewer competitor in the post-pandemic market, but we could not assure you that 1.0 of business were not negatively impacted by COVID-19 pandemic in the year 2022. We remain confident in the prospects for international travel with the worldwide destination continuing to progress and more and more countries opening their borders to tourists in year 2022 and beyond. With that, I would like to reiterate our vision for the 1.0 international data connectivity business. Our plan is to not only continue providing existing high-quality 1.0 of business but to size big market share with the development of more innovative products and services. Let's move to Page 14. uCloudlink 2.0 is our local data connectivity services business and has become a new [ drive ] of revenue growth since the year 2020. Its business monetization model is a similar that of the uCloudlink 1.0 with a massive potential local user base. Our new HyperConn technology contributed to the further development and the growth of our uCloudlink 2.0 business, and we have expanded the business scope of our local data connectivity services. Currently, our innovative HyperConn technology is widely accepted by mobile network operators and business partners in various industries with greater growth potential, such as with local partners in China, U.S. and Japan. Our 2.0 business shows a greater deal of resilience with proven high demand and growth potential during the pandemic. We help operators improve their data services and solve the data connection problems through our PaaS and SaaS platform. We provide high-quality data connection for 5G applications in response to the increased demand for better connectivity services. Furthermore, as people get used to the new normal, our product and services provide better performing solutions for remote work and learning, which require reliable connectivity as well. For example, our new tablet equipped with HyperConn, and cloud SIM technology has been put to use in new industries such as education. We have made progress through HyperConn solution with mobile and fixed broadband business under various application scenarios such as home broadband. For example, our mobile and fixed broadband business cooperation with one of our major network operator in China has been successfully launched and distributed to more province. We also plan to invest more GlocalMe Inside we call GMI in smart device by cooperating with more intelligent hardware manufacturers. In addition, we have extended our footprint into a more application scenario, including but not limited to Internet of Things, IoT modules, industry Wi-Fi routers, IP camera, power supplies, emerging services, live broadcasting e-commerce and Autopilot, et cetera, and are actively exploring new business prospects to serve a broader spectrum of IoT applications. We expect our 2.0 business to grow with the support of our innovative cloud SIM and HyperConn technology as we continue to introduce our solutions, services and products to the market and strengthen our operations with the local partners. Let's move to Page 15. Based on our innovative cloud SIM and HyperConn technology solution, we continue to develop and broaden our portfolio of offerings with new products and services such as our self-developed terminals, third-party devices. For example, after we unveiled our new HyperConn technology and product in June of year 2021, we launched these solutions and products to the market in the second half of year 2021, such as Numen, the world's first HyperConn 5G mobile Wi-Fi, and Genie, a tablet device in third quarter of year 2021 and the Mini Turbo portable Wi-Fi hotspot equipped with HyperConn in the fourth quarter of year 2021. Our IP camera, IPC has completed testing and expected to launch commercially soon. Our HyperConn technology solution has been well received and related products are gaining recognition proven by growing users -- user base across a wider spectrum of industry. Going forward, we plan to launch more of these types of innovative products and services. uCloudlink positions itself as a pioneer technology solution provider in the data connectivity market. In year 2021, we made it a priority to invest in research and development, most notably in technologies like cloud SIM and HyperConn that are compatible with various application scenario, both of which greatly reinforce our technology advantages. Our mature 1.0 business and newer 2.0 business will together promote the long-term development of the PaaS and SaaS ecosystems, which has been recognized by various business partners. As stated in our earnings release, we anticipate growing total revenue for full year -- of year 2022 by 15% to 35% to a range between USD 85 million to USD 100 million versus total revenue of years -- of the USD 73.8 million in year 2021. The company expects to improve financial performance with the support of our commercialized HyperConn technology and related 5G products, the continuous business expansion of our existing portfolio of diverse IoT application scenario, as well as the ongoing efficient improvement strategy implemented since the quarter 4 of the year 2001 to reduce operating expense. We believe that from the connected to better connections, uCloudlink is a significant driving force in the transformation of the increasingly advanced information era. We are committed to build a more connected future for more customers and users, and we strive to make a positive impact in serving the global user community. I will now turn it over to our CFO, Yimeng Shi, who will go through business and financial highlights.

Thank you, Mr. Chen. Hello, everyone. Let us turn to Page 17 for our business highlights. The left-hand side of the slide shows daily active terminal, DAT, as of December 31, 2021. Average daily active terminals in the fourth quarter were 265,595, including 1,585 owned by company and 264,010 owned by our business partners, representing an increase of 28.7% from the 206,400 in the fourth quarter of 2020. Our uCloudlink 2.0 service accounted for around 69% of the total DAT during the fourth quarter of 2021. Average daily data usage per terminal was 1.73 gigabytes in December 2021. Let us turn to Page 18, which shows global diversification of our business. We had 97% of the total revenue from outside Mainland China. During the fourth quarter of 2021, Japan contributed to 37% of the total revenue. For other countries revenue, the U.S. market has the largest contribution to our business with further development of our U.S. business, and we will continue to expand all the markets such as Japan, China, Europe and Southeast Asia, et cetera. During the fourth quarter of 2020, we had 5% of total revenue coming from Mainland China, 47% of the total revenue came in from Japan and 48% of total revenue came in from other countries and regions. Let us turn to Page 20. I will go through our financial highlights of the fourth quarter of 2021. Service-related revenue as a percentage of total revenue was 54.8% during the fourth quarter of 2021, compared with 32.9% during the fourth quarter of 2020. Revenue from PaaS and SaaS service increased 43.5% from $1.9 million in the fourth quarter of 2020 to USD 2.7 million in the fourth quarter of 2021. This increase was primarily due to expansion in the number of our business partner that use our PaaS and SaaS service to provide local data connectivity service. Revenue from PaaS and SaaS as percentage of total revenue also increased to 15.2% during the fourth quarter of 2021 compared with 10.9% during the fourth quarter of 2020. Let us move to Page 21, which shows the revenue breakdown of our 2 business segments, mainly revenue from service and sales of products. Our total revenue increased by 3.2% from USD 17 million in the fourth quarter of 2020 to USD 17.6 million in the fourth quarter of 2021. Revenue from service were USD 9.6 million, representing an increase of 6.8% from USD 9 million for the same period of 2020. This increase was primarily attributable to the increase in revenue from local data connectivity service and the PaaS/SaaS service. Let us turn to Page 22 for the gross margins of our business. Our gross -- service gross margin increased to 46.1% in the fourth quarter of 2021 compared to 41.2% in the fourth quarter of 2020, and our overall gross margin was 31% in the fourth quarter of 2021 compared to 31.4% during the same period of 2020. The increase of our service gross margin during the fourth quarter of 2021 was primarily due to the increase of our PaaS/SaaS revenue, which has highest gross margins over other business revenue. Let us move to Page 23, 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 62% in the fourth quarter of 2021 compared with 83% during the fourth quarter of 2020. The past few years have been a peak time for research and development, and we will optimize the research and development cycle and continue to improve our operation efficiency of our business. Let us turn to Page 24. Operating cash flow was negative USD 3.2 million during the fourth quarter of 2021 compared to negative USD 5.5 million during the fourth quarter of 2020. Our cash and cash equivalents and short-term deposits were USD 8.8 million as at December 31, 2021. Our CapEx was USD 0.2 million during the fourth quarter of 2021 compared to USD 0.4 million during the fourth quarter of 2020. CapEx as percentage to the revenue decreased from 2.2% during the fourth quarter of 2020 to 1.3% during the fourth quarter of 2020 (sic) [ 2021 ]. Let us move to Page 25. Net loss during the fourth quarter of 2021 was USD 15.5 million compared to USD 12.4 million during the fourth quarter of 2020. Adjusted EBITDA was negative USD 5.1 million during the first quarter of 2021 compared to negative USD 7.9 million during the fourth quarter of 2020. With that, let me conclude today's presentations. Thank you, and we will start our Q&A session.

[Operator Instructions] And our first question today comes from Lisa Thompson from Zacks Investment Research.

So I have a number of questions about the quarter. First, could you just tell us what's the currently -- the current fully diluted share count now that you have a convert?

Lisa, can you repeat the question?

Yes. What's the current fully diluted share count now that you've issued a convert?

Yes, we will disclose the diluted shares taking into account this convertible debenture issues in this January. So that figure will be disclosed in the first quarter when release this year.

Okay. So this is the number. All right. As far as cash burn, where are you now? Is it $1 million a month or less than that?

In the fourth quarter of 2021, we [ bonded ] USD 3.2 million for operational cash flow. As of December 31, 2020, the company had cash and cash equivalent and short-term deposits, USD 8.1 million and short-term investment at USD 12.6 million. So in January 2022, the company completed an issuance of a convertible debenture through private placement with proceeds of USD 4.7 million based on the company's projection of cash flow and the existing balance cash, cash equivalents, short-term deposits and short-term investment. And I think the company's -- company have a sufficient fund for sustainable operations. And the company has taken measures to successfully execute its business plan, which includes increasing revenue while controlling operating expenses to generate positive operating cash flow and obtaining funds from external sources as well. So we expect the cash burn rate will be improving this year materially. And so we expect into our guidance and others, we were managing the cash flows in a healthy position for this year.

So do you think you'll get to cash flow breakeven by the end of the year?

That's what we are expecting, and we will achieve -- management will be -- take efforts to achieve that target.

All right. As far as the income statement, could you say what was that $8.7 million in other expense? What caused that?

You mean the breakdown of the operating expenses?

Right.

You see there is...

Are you there? What's in that number? What's in the number, the $8.7 million? What's in there?

$8.1 million cash balance, right?

No, $8.7 million other income on the income statement? Under general and administrative, right, there's $8.7 million in expense?

Lisa, can we have feedback this -- and the [indiscernible] for these figures after this call to you. Is that okay?

Okay. It's not an easy answer. So also could you give an update on -- do you still have the education order for tablets in Japan? Or has that been canceled? And when might that start?

Can I pass that question to Mr. Yeo, or Chaohui Chen to answer this question.

Okay.

He is asking about the private contract in Japan, right?

Yes.

So can you repeat your question? Yes, it's about tab in Japan, right?

Yes.

Yes. The tab order in Japan is still going on. But because the school in Japan, it's a face-to-face education, restart again. So the speed is a little bit slowly than our expectation, but still going on.

Okay. And is there an explanation for why revenues in Japan are declining?

Yes, I think it's clear because -- and of course, when the COVID-19 happened, because local requirement is big -- is huge. But because face-to-face meeting, because in year 2021, the Q2, Q3 and recovery, and the Q4 because COVID-19 virus still become worse again. But before that, because of the pandemic is getting [ worst ] because of the [ destination ], because of the new medicine come out. So face-to-face meeting and face-to-face education and remote working. So decrease in Japan that, that domestic 2.0 a little bit decreasing.

Okay. And my final question is, are there any more products you plan to launch soon?

Yes. Yes, you can see that we have -- we have [ U5 ] Numen, which is the fourth -- 5G product, 5G -- the [ workflow is ] 5G with the HyperConn solution, that can switch between Wi-Fi, all the 5G, 4G all the network. So this launch in the third quarter. And because the radio band only with Asia and the Europe radio band, we don't have the global radio band at the moment. And recently, we launched our new product, we call U 5.0 with global radio band and a more competitive price and to accelerate the 5G product launch. That's one part. And the second part we have more, like a CPE IoT module with HyperConn Inside. So we are launching -- as I mentioned in the fourth quarter, we finished testing for more IoT products such as industry router. So we launched in the fourth quarter of year 2022. And a new module, more competitive module we launched in the year 2000 -- the fourth quarter of year 2022. And also, we have IP camera product launched in the fourth quarter of year 2021. The more product come up, including the 5G, including more IoT products. And also, we have more HyperConn product into our international roaming Wi-Fi as well.

And our next question comes from Vivian Zhang from Diamond Equity.

So we see the company maintained top line growth during the second half of last year, with strengthened partnership with business partners and the PaaS and SaaS business growing. So we'd like to know why the company effect of 4% to 21% year-over-year decrease in first quarter 2022 revenue? What's the main reason for the decrease in outlook?

The guidance for the first quarter of this year, 2022, that range is between $14 million to $17 million. That's a decrease compared with the last year's -- the first quarter of '21. Yes, as you -- as we said it, there's the COVID-19 have an impact on the supply chain, not in this quarter, the first quarter's, some lockdown occurred in China, like Shenzhen and Dongguan, these kind of areas. And that gives us some difficulty for manufacture and delivery with some orders at hand. And that's -- there's some reason that we're aware recently. So we have -- we expect this -- the first quarter's -- first quarter's guidance a little bit dropping compared with last years. Some -- yes, that's -- Mr. Chen, do you have some color on this first quarter guidance decreasing?

Yes. So mainly is because of 2 reasons. One is because of Omicron, COVID-19 virus. And the second is because of the lockdown in China, in Shenzhen and in Dongguan, that's our manufacturing base, that heavily impacted our revenue. So by the [ fourth ] quarter, but we believe in the second quarter because of more country open and variant -- COVID-19 variant impact will be decreasing.

Okay. I understand. So my second question is regarding your ongoing restructuring. Can you provide some additional color on why the company adjusted the [ value ] structure and the local business in China? And will this affect the company's future revenue in China as well?

Yes. As we disclosed this year, we continue to evaluate our business plan, and we have decided to adjust our business model in China, yes. So on March 17, 2022, the equities of the AE was transferred to the Shenzhen uCloudlink Technology Limited. An original [ AE ] agreement were terminated. So we believe this restructuring will not affect our uCloudlink 1.0 international data connectivity service in China. So we will transfer and carry out the PaaS/SaaS platform service in China in cooperation with the local business partner such as we invested Beijing Huaxianglianxin Technology Company, which have the required license to provide local data connectivity service in China. So that's -- we adjusted the model in China as similar as we, in Japan. So you can see our PaaS/SaaS ecosystem and our PaaS/SaaS service apply to corporate, with a local partner either in Japan, in China, other regions of the world. So that's -- we adjusted this model to execute huge PaaS/SaaS platform-centric with a business model and strategies as well. So that's -- I think this is a key reason. We adjust the varying models in China. I think this give us more secure position in compliance and operation as well. And it give us position cooperated with a local partner to do the business in local market.

And ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the floor back over to management for any closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact uCloudlink Investor Relations through our contact information provided on our webcast or Equity Group Investor Relations.

And ladies and gentlemen, I apologize. This is the conference operator. We do have a late joining question from Jakob Kurtz from Greenridge Global.

So daily active terminals continued to increase in the current quarter, but total data consumed slipped compared to the third quarter. Should we expect to see both numbers rise over the course of 2022?

This data consumers per daily active terminal will be a change in terms of this packet selling the mix and different target policy that the customers choose. So that's a change in its statistic figure. So we cannot accurately expect forecast, this data consumers per daily active terminal will be increasing somehow. We don't know this -- we cannot give this, this clear color on this -- with this kind of consumption, this average daily terminal.

Okay. And then my next question, assuming travel restrictions stay roughly similar to what they are now in China for the remainder of 2022, what percent of total revenue do you expect from 1.0 and 2.0?

[ And specifically, we mentioned ] these revenues from China, Mainland China?

Sorry, what was that?

All right. Can you clarify your question?

Assuming travel restrictions stay similar to what they are currently in China for the remainder of the year, what percent of total revenue do you think 1.0 and 2.0 will account for by the end of the year?

Yes, this COVID restrictions is still implemented in China, across city and something. So the Chinese -- the border has not been open to the outside. We don't know when the Chinese will open to the outside this year. But we do expect there's -- the border has been opened and lift up in U.S., European and some Asian countries like Japan, Singapore, some other Asian countries as well. So as you're aware, we run our business as across worldwide, we have a diversification business for more than 50 countries and the regions. So yes, China's contributions is smaller at this moment. The rest outside of China Mainland -- when there's international travel has been recovered due to this opening up the borders. So we expect that we have the international connected service will be improving outside of China this year. That will be -- give us a growth and improve our profitability as well for this year.

Yes. I have some more comment from the [indiscernible]. So for -- in the China market, so we don't expect 1.0 business recovery because we think maybe end of this year or next year, we started -- opened the border of China. That's our forecast in the worst case. We don't think that will happen in China for -- open the whole year. So that's one. So in China, we are mainly focused on 2.0 business and IoT business. So that's in China. So for international business, so we only not to worry -- opportunize data. For example, we don't think under the COVID-19 impact -- so worst case, we don't think we'll open really quickly. We start to think in Q2, some countries opened the border of the country. But majorly the outside China countries will be starting on the Q3 or Q4 to open the country. That's our assumption.

Okay. And then my next question, the markets outside of China and Japan have been showing strong growth recently. Are there any countries or regions driving this? And do you expect to see growth continue to be faster in these regions?

Yes. So once we [ saw it ] in the 2 pronged challenges, one is about the regulation challenge and also for the IoT. So -- and also the recovery of 1.0 in China, we believe we will regain the fast growth in China.

For others, the potential to fast growth, we expect that Japan's market, and the U.S. market and European markets is -- will be the main growth in the business for this year.

Okay, awesome. And then last question. Was the settlement with SIMO Holdings completed?

Sorry, can you repeat?

Was the settlement with SIMO Holdings completed?

That was -- yes, that was fate of last year. So we launched the agreement last year. And so it's peaceful, no more litigations between -- we had with SIMO. Yes.

And ladies and gentlemen, with that, we will conclude today's question-and-answer session and conference call. We do thank you for attending today's presentation. You may now disconnect your lines.

Thank you.

Thank you.