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

Good morning, and welcome to the uCloudlink Group Inc. Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] 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.

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 the 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 Brand President of Marketing and Sales. Our CEO, Chaohui Chen will begin with an overview of the company's recent business highlights and uCloudlink 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 maintenance to 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 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 includes discussions of the unaudited GAAP financial information as well as unaudited non-GAAP financial measures. UCloudlink's press release contains a reconciliation of unaudited non-GAAP measures to 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.

Thank you. Afternoon 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 [indiscernible] year for uCloudlink characterized by achieving great success and overcoming tremendous challenges. We are pleased to have achieved positive operating cash flow of USD 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 difficult 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 USD 7.7 million. For 2022, uCloudlink 1.0 business revenues increased 29.6% year-over-year to USD 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 2 years, we have continued to strengthen our present in market like Japan, North America, Southeast Asia, where we have give up -- 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 CloudSIM and HyperConn technology solutions. Our uCloudlink 2.0 business report USD 7.4 million in revenues, up 55.5% in year 2022 from USD 4.7 million in year 2021. On the international -- 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 Wi-Fi 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 solution market since the beginning of the 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 addition as a 5G roaming solution provider and launched uCloudlink 1.0 products and solutions, such as the eSIM solutions to certify 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 nature customer relationship for the uCloudlink 2.0 business in existing key markets like Japan and North America. We have gone more industry recognition in China, which is expected to accelerate uCloudlink 2.0 business growth. In January year 2023, our various market network, intelligent connection engineering, technology research center was approved as one of the Guangdong province Engineering Technology Research Center by the Department of Science and Technology of Guagndong province. We believe, these recognition serves as a testament to our continued technology advancements in mobile and data connectivity technologies and brings in 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 augment reality, AR, and virtual reality, VR, electric vehicles, et cetera. We expect to make a breakthrough in Japan market, where we have a strong presence, happy business partners to further improve their data connectivity experience in the IoT field. We remain on track 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. With that, I would like to touch on uCloudlink near-term initiatives. uCloudlink 3.0 to initiate a mobile data traffic-sharing marketplace application based on our efforts in building a scalable user base to our uCloudlink 1.0 and 2.0 models. This marketplace enables a user's 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 the limitation of the device including top up and go GlocalMe terminals, active and go using GlocalMe data, application-only solution. GlocalMe SIM, GlocalMe Inside the third-party device, mobile WiFi 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 in the near future, we expect to continue to make investments into optimizing the system on an ongoing basis, incorporating more state-of-the-art technologies such as blockchain technology. We are committed to continuous development of innovative solutions and plan to expand our CloudSim and HyperConn technology solutions to various application scenarios, including media, video conference, outdoor live broadcasting, et cetera. Based on these innovative CloudSim and HyperConn technology solutions, we expect to launch more innovative products targeting need -- to the needs of a diverse set of enterprise and individual customers in year 2023, one of which is -- not 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 year 2023. for 2023, we expect total revenues of between USD 85 million and USD 100 million, representing an increase of 19% to 40.1% compared to year 2022. We expect to build a more historic financial and operational position to fuel better results in the future. We are pleased with our achievements in 2022, and I would like to extend a heart-filled thank you to all the uCloudlink team members for their efforts and dedication to strengthening our company. We feel confident in the opportunities and challenges 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 through our global markets. uCloudlink remains focused on scaling our user base and constantly improving the technology and business operation model to build a mobile data traffic sharing marketplace, which will fill the company's long-term growth. I will now turn the call over to our CFO, Yimeng Shi.

Thank you, Mr. Chen. Hello, everyone. I will go over our operational and financial highlights for the fourth quarter and full year of 2022. Average daily active terminal, DAT, is an important operating metrics for uCloudlink [indiscernible] trends customer usage trends over each of the period, which is reflective of our ongoing internet environment. In the fourth quarter of 2022, average daily active terminal were 297,884, of which 2,229 owned by the company and 295,585 owned by our business partner, up 12.2% from 265,595 in the fourth quarter of 2021. Our uCloudlink 2.0 service accounts for around 62.1% of the total DAT during the fourth quarter of 2022. Average daily data usage of terminal was 1.68 gigabytes in December 2022. Total revenue for the fourth quarter of 2022 were USD 19.6 million, representing an increase of 11.6% from USD 17.6 million in the same period of 2021. Revenue from service in the fourth quarter of 2022 were USD 12.5 million, an increase of 30.3% in from USD 9.6 million in the same period 2021. Revenue from service 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 countries 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 USD 10.4 million or 53% of total revenue in the fourth quarter of 2022 compared to USD 10.9 million or 62% of total revenue in the same period of 2021. As a result of a more favorable business mix and significantly decreased operating expenses, we report narrow net loss of USD 1.1 million in the fourth quarter of 2022 compared to a net loss of USD 15.5 million in the same period of 2021. Similarly, adjusted EBITDA improved to USD 1.6 million during the fourth quarter of 2022, which compared to negative USD 5.1 million in the same period of 2021. We were proud to have achieved positive operating cash flow of USD 5.2 million during the fourth quarter of 2022, which compared to negative USD 3.2 million during the same period of 2021. Moving to 2022 financial results. Total result -- total revenue for 2022 were USD 71.4 million compared to USD 73.8 million in 2021. The decrease was primarily due to decreasing sales of certain terminals and data-related products, partially offset by an increase in international and local data connectivity service. Revenue from service for 2022 were USD 46.2 million, an increase of 22.3% from $37.8 million for 2021. Revenue from service as a percentage of total revenue was 64.7% during 2022, up from 51.2% during 2021. In 2022, revenue from the international data connectivity service were USD 28.1 million. And the local data connectivity service was USD 7.4 million, increasing by 29.6% and 35.5%, respectively, year-over-year. This increase in revenue for data connectivity service was mainly attributable to the gradual recovery of international travel and the continuous development of our local data connectivity service segment. Overall, gross margins 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. We increased our service gross margin 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 margins. During 2022, we streamlined our business operations, which led to significant reduced operating expenses. Excluding share-based compensation, total operating expenses decreased to USD 34.4 million or 48% of total revenue in 2022 compared to USD 47.1 million or 64% of total revenue in 2021. In 2022, we significantly lower net loss, which was USD 19.9 million compared to USD 46 million in 2021. Adjusted EBITDA lower to negative USD 2.3 million during 2022 compared to negative USD 22.6 million in 2021. During 2022, our CapEx was USD 0.4 million compared to USD 0.9 million in 2021. For the full year '22, we achieved positive operating cash flow of USD 4.4 million compared to negative USD 21.7 million during 2021. Moving on to balance sheet items. Our cash and cash equivalents and short-term deposits increased to USD 15.1 million at December 31, 2022, compared to USD 8.1 million at December 31, 2021. We are pleased to have stressing the company's financial position over the course of 2022 and are well positioned to continue growing our business in the near term. With that, operator, let's open it up for Q&A.

[Operator Instructions] Our first question will come from Theodore O'Neill of Litchfield Hills Research.

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?

Yes. Thanks, Theo. Yes. This is Yimeng Shi. [indiscernible] give more color on the improvement gross profit -- gross margins. Yes. Generally, the improvements came from a service mixture as we -- disclosure in this statement. And we have more international connectivity service in our total service portion. And international connectivity service have higher gross margins than local connectivity service. And also in our service mix. We have a significant portion across 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 there's data consumptions usage and also we put controls on commercial side and keep this commercial pricing on some stable levels. So that's the whole year that give us improving gross margins compared with the year 2021. And service gross margin is coming back to the history, the core years levels 2019, and is the service gross margins pick up to 59% overall in the whole year. We expect this trend for this higher gross margins 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 these same trends compared with last year as well.

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?

Yes. Yes, that's correct, yes. In 2022, we put significant efforts on cash collections from the account receivable from the current year 2022. 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 effort on savings and to collect cash quickly from the customers' side as well. And I think we have a good customer pools from the Japan market from the U.S. market as well. So this -- the cash collection cycle is very important for us to have a quick cash inflow to support our operations and the business growth.

The next question comes from Vivian Zhang of Diamond Research.

This is Vivian Zhang from Diamond Equity. 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 revenue in 2023 and beyond?

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 uCloudlink [indiscernible] 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 every things 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 that China will happen. So this year, around 40%. So that's our forecast based on our -- based on this. And our year 2023 forecast is based on this assumption. And we believe maybe since will go more much better. So if the things go more much better and we will get more better result. So that's from the China and Southeast Asia, like Japan and Korea, they are not open as early as like in Europe, in the United States. I think this year, major from Southeast Asia and China, we get at least 40% to 50% recovery. And next year, we are fully recovered. That's our expectation.

Okay. Thank you, Mr. Chen. My next question will be about product. Are there any products the company plans to launch or update in 2023? If so, can you briefly introduce them?

Yes. So we have -- even last year, we acquired a challenging year, but our R&D is the highway investment in the R&D side. So you can see these years, we will not only launch the 5G product, less leading in the industry. Currently, almost -- it's the only one product can roamind all the 5G network in the world. This will build our leading position for commercial business traveler. So that's -- we believe that's the best connection experience for international market. That's one side. Another side, we were near -- in near term, we will -- in next month, we will launch a world smallest product, just smallest creative product. So we call [indiscernible]. So this will be around in near term. So that's another creative product. It's very -- smaller than just a credit card. So it's really -- it's a smallest in the world. So that's another creative product. It's easy for caring for the international and the local improvement for the network and roaming. Also, we have some other new products for mobile broadband and fixed broadband convergence product and 5G and CPE and the [indiscernible] CPE, these were another more viable network for fixed and mobile convergence. And also this year, we will launch one app marketplace 1.0 solution marketplace solution is already up for 1.0 app. And this app were launched in near term also. Then we can meet the different requirements of the user for roaming, not only just for CloudSIM eSIM. So also we find -- so we can meet almost various all kinds of the customer need for travel. So then we can attract more customers and provide a more -- attach more customers' catalog and segment. So this will increase our customer appointment and also our influence for a roaming solution. So that's another new product, we will launch, that's for software and hardware as well. So basically, also as we have some other new products we launched at the end of the year, so that's a near term I can show to you for the product we launched in the year 2023. Yes. By the way, so for the IoT, IoT side, we have a lot of new product launches like IP camera, like industry motor and also more product impact into the like power supply a solar power systems, et cetera. The more and more IoT sales product will embed our CloudSIM solution, which can provide the better courage and reliable network connection, and we save the cost and statement cost and also launch costs and also the maintenance costs that are an advantage and also enhance the reliability of the IoT network. So that's some in case there's quite a lot of the new solutions, especially our marketplace and we gained some software launch in these years.

Okay. Got it. Thank you for detailed information. Just to make sure these projects and hardware updates will be launched to global markets, right, not just some certain markets like Japan or U.S. or something right?

Yes. So yes, I think -- by the way, we will -- our technology will be more recognition by Chinese government. So -- and also by more application like in Japan market, I think more and more user and partner recognize our technology for IoT for this new product. We believe we can get, I think more wider on the growth of year 2023. [indiscernible].

Okay, got it, that helps. Go ahead.

Yes. You asked the question is whether the new product will launch to the global market. Yes, it will go along the global market, but we will deliver to the Japan market U.S. market as well. So that's a target for the global market.

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

Thank you once again for joining us today. If you have further questions, please feel free to contact uCloudlink's Investor Relations through the contact information provided on our website or contact our Investor Relations firm, The Equity Group. We look forward to speaking to you again on our next quarterly call. Thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.