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

Good day, and welcome to the uCloudlink's First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jillian Zeng, Investor Relations for uCloudlink. Please go ahead.

Thanks, everyone, for joining us on our first quarter 2023 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com as well as our newswire surveys. I will give a brief introduction to our uCloudlink management team. Mr. Zhiping Peng is our Co-Founder and Chairman of Board of Directors. Mr. Chaohui Chen is our Co-Founder, Director and Chief Executive Officer. Mr. Yimeng Shi is our Chief Financial Officer. Mr. Chaohui Chen, our Co-Founder and CEO will begin with an overview of the company's recent business highlights and which will cover the earnings presentation posted on our IR website. Mr. Yimeng Shi, our CFO will then discuss the company's operational highlights and the 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 team'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 cautionary statements, risk factors and 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, Jillian, and good morning, everyone. Thank you for joining us on our first quarter of year 2023 earnings call today. We appreciate everyone's time. We are pleased to start off 2023 with strong first quarter results, which is the first time that we achieved both positive net income and positive cash flow generated from operations with growth in revenue since the outbreak of the COVID-19 pandemic. The average daily active terminals continued to be in an upward trend and reached a historic high of over 300,000 in this quarter as we continued to expand our global PaaS and SaaS ecosystem, reflecting the accelerated market demand for uCloudlink's services across the global market. UCloudlink 1.0 is our international data connectivity services business, which tends to be a higher margin line of business and has historically been one of our key growth drivers. During the first quarter of year 2023, uCloudlink 1.0 business revenues increased 38.5% year-over-year to USD 7.8 million. We are delighted that our uCloudlink 1.0 business demonstrates significant growth as a result of accelerated international travel recovery across our major markets, particularly in Japan. We also have observed increased demand for our 1.0 Roamingman businesses in Mainland China and Southeast Asia, which are historically strong market with wide coverage of Roamingman brand. Average daily active terminals for uCloudlink 1.0 business increased by 55.3% compared with the same period of year 2022, which indicates the significant growth of our business. We remain optimistic in our ability to further grow our uCloudlink 1.0 business, led by solid design, our leading global position in the international data Roaming solutions market. And we look forward to service our users globally as the market continues to pick up. UCloudlink 2.0 is our local data connectivity services business, which focuses on local residents and solved challenges among the carriers. This business took off during the pandemic as we see the opportunities in the local markets by offering reliable local data connection services. Over the past 2 years, we continued to strengthen our presence in local markets, including Japan and North America, where we have operator and business partners improved their data connectivity services and reserve data connection problems through our PaaS and SaaS platform based on our patent technologies, including processing and HyperConn technology solutions. Our uCloudlink 2.0 business reported USD 2.2 million in revenues, up by 37% in the first quarter of year 2023 as compared to USD 1.6 million in the same period of year 2022. We received recognition from business partners in established markets like Japan and North America and continued our efforts in expanding our PaaS and SaaS platform ecosystem. We expect our high-quality, reliable data connectivity services based on our innovative HyperConn technology will receive more industry recognitions and applications, especially in the mobile and fixed broadband industry. We expect to launch more innovative HyperConn products covering to the needs of a diverse set of mobile network operator and virtual mobile operators, business partners and individual customers in the near future. On the IoT -- on the Internet of sales, IoT, side of our business, we have shared updates on market application scenario supported by our IoT module, including Wi-Fi router, IP cameras, et cetera, which has been welcomed by our customers in various markets for their competitive advantages. In Japan, we are actively working with our business partners to explored and expand application scenarios for the IoT business to further improve the data connectivity experience for their customers. At the same time, our team continues to leverage existing resources in the research and development to develop uCloudlink 3.0 business. The one-stop mobile data traffic sharing marketplace application is planned to launch the fourth version in the near future, which leverages our efforts in building scalable users based through our uCloudlink 1.0 and 2.0 models. This marketplace enabled end users devices to connect to available network anytime anywhere, utilizing the local neat app new version. We remain confident in the market conditions ahead for the remainder of year 2023. And we're prepared to take advantage of the peak season of international travel during the summer. We believe our track record of delivering reliable and high-quality data connectivity experience and our history of introducing innovative products and solutions enable us to maintain a leading position in the international data connectivity services industry. We are always committed to continuous development of innovative solutions and plan to expand our uCloudlink and HyperConn technology solutions to more application scenario. Our business aims to deliver value-added services to our customers by continuously improving their mobile data connectivity experience. And we will continue to execute our growth strategies with our expanding portfolio of offerings. I will now turn the call over to our CFO, Mr. Yimeng Shi.

Thank you, Mr. Chen, welcome everyone. I will go over our operational and financial highlights for the first quarter of 2023. Average daily active terminal DAT is an important operating metric for uCloudlink as it measures the trend of customer usage over the period, reflecting our ongoing business performance. In the first quarter of 2023, average daily active terminal were 304,121, of which 300,483 owned by the company and 300,638 owned by our business partner, up by 11% from 273,870 in the first quarter of 2022. The average DAT for our uCloudlink 1.0 and uCloudlink 2.0, business accounted for around 42.7% and 57.3% of the total DATs, respectively, during the first quarter of 2023. Average daily data usage per terminal was 1.62 gigawatts in March 2023. Total revenue for the first quarter of the year 2023 was USD 18 million, representing an increase of 15.3% from USD 15.6 million in the same period of 2022. Revenue from service in the first quarter of 2023 were USD 12.9 million, an increase of 31.4% from USD 9.8 million in the same period of 2022. Revenue from service as a percentage of total revenue was 71.7% during the first quarter of 2023, up from 62.9% during the same period of 2022. During the first quarter of 2023, Japan contributed 43.1%. North America contributed 33.6%, Mainland China contributed 5.1% and other country and regions contributed the remaining 18.2% of the total revenue compared to 40.2%, 37.9%, 1.9% and 18%, respectively, in the first quarter of 2022. Overall gross margins improved to 47.8% in the first quarter of 2023 as compared to 37.4% in the same period of 2022. And our gross margins on service increased to 50.5% in the first quarter of 2023 from 49% in the same period of 2022. Excluding share based compensation, our total operating expenses decreased to USD 6.9 million or 38% of total revenues in the first quarter of 2023 as compared to USD 9.3 million or 60% of total revenue in the same period of 2022. We realized net income of USD 2.1 million in the first quarter of 2023, which represents a significant improvement on our bottom line results as compared to a loss of USD 7.9 million in the same period 2022. Similarly, adjusted EBITDA improved to USD 2.1 million during the first quarter of 2023 as compared to USD 3.9 million in the same period of 2022. We are pleased that this is the first time we achieved positive net income since the outbreak of COVID-19 pandemic and adjusted EBITDA has remained positive for 3 consecutive quarters. We have achieved positive operating cash flow USD 1.6 million during the first quarter of 2023, which compared to elective USD 4.4 million during the same period of 2022. We have significantly improved our bottom line in the first quarter of 2023 and have generated positive cash flow from operations for 4 consecutive quarters. Our strengthened financial position enabled us to execute our growth strategies. With that, operator, please open it for Q&A.

[Operator Instructions] The first question today comes from Theodore O'Neill with Litchfield Hills Research.

Congratulations on the good quarter. I have 3 questions for you. The first on gross profit. I can see that the overall margin was better in the quarter because you had a greater mix of services. But I wanted to understand the margins got better on both products and services. Is that due to pricing? Or was, there some efficiencies in the products?

So we answer your questions one by one. So you just raised the first question, right? Yes, regarding the gross profit, you will see -- we improved our gross profit -- gross margins in the past couple of quarters. So that's a massive improvement on a quarter-to-quarter basis. For the service gross margins is improving depending on the mix of the service categories. So that's a mixture, the 3 categories, main service revenues, one, the international roaming connectivity service, one is a local connected service and the PaaS and SaaS service. So the improving gross margins will reflect the proportions of the revenue generating from international roaming service and from PaaS-SaaS is growing, growing faster than the low-cost connectivity service. So that's where we get this -- the improving results of the gross margins improving over the past couple of quarters. So we look forward in the near future this year, because the border has been opened up is for most countries. So the people can move cross-border more freely than before. We expect there's more revenue will be generated from international roaming, connectivity service. So assuming the proportions of the international roaming service, it will be improving in the future. So we expect the overall service gross margin will be improving a bit, at least keep stable in following quarters of this year. That's my opinion.

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

Yes, I'll answer the first half part regarding the decrease in the R&D expenses. Our CEO may give some colors on the new product. Yes, it's a very -- we report that streamlines our operations since the year 2021. And that's reflecting our overall headcount is decreasing compared with the year 2022. So the number of headcount has been cut off for some certain part for improving our operational efficiency. And so that's with reflecting on a comparable basis. So our overall expenses -- expenditures has been decreases on a year-to-year basis. And that's the similar story for this R&D functions as well. We invested a lot in the past couple of years. We invested a huge investment on research and development functions. So that support our -- every year, we launch different new products and new futures and upgrade our platforms as well. And so -- but we will still invest to leverage our R&D to support to develop a new product. So regarding the new products, development, our CEO will give some more color on that.

Yes, I add some comments because 2 years ago, we have invested in R&D side. You can see our loss 2 years ago that have lost that because we have invested in the R&D side. So here, 5G here the headcount, we finished all the development, then we end of last year, we started to control the cost and control the R&D investment. But this is no impact our new product launch in these years. So in my presentation, I really tell the 2. We will launch in the near future for our HyperConn product. This will meet for mobile broadband and fixed broadband. This is a huge opportunity for the mobile broadband operator market. I think in the next quarter, we are prepared to launch around this time. We will launch this new series of new products in the second quarter and third quarter. So we continue to have this HyperConn product launch to enhance high-quality reliable quality because no matter fixed broadband or more broadband operator, their network will face the value. Once the failure happens, we can help them to improve the experience, that's a quite unique solution. We expand this HyperConn connection product to expand to the different scenario for carrier and for the type of carrier, fixed-broadband carrier and mobile broadband carrier. And also we will launch some new products for 1.0 business to enhance, to meet a more convenient, more compact and more 5G product leading position and both these 2 directions. And we will launch more new products to meet 1.0 fast-growth market as well. And also for IoT, so we will launch an IoT product to improve the reliable. We apply the HyperConn technology into our IoT products, because we know the autopilot like robotic this IoT technology scenario also needs a very high reliable connection. So in this high reliable connection, we do a lot of pass through. We hope in the coming quarter, we can give this good news to everyone. So basically, once our growth and the growth of recovery from the pandemic; so our R&D will also keep very stable investment and also our new product new solutions because of historic investment. And after this year, we will keep -- also strengthen our R&D investment. I believe we will get a more good result and the bright future for our HyperConn technology.

Okay. And my last question is about accounts receivable. You've done a remarkable job of keeping receivables low relative to revenue. Is that primarily because the services are prepaid?

Yes. I think it's the improvements on the balance account receivable depends on a couple of factors. Yes. The first one is we pay more attention and efforts on improving our business term, as you say, mentioned the prepaid terms and the credit -- the short-term credit term and some we have some more -- some bigger orders from this a good credit customer as well. So that's the first, I think the first contributor for the improving the balance. And the second part, I think that we pay efforts to collect the cash from some agents account receivables, some customers suffer this pandemic 1 year ago, 2 years ago. So now they recovered gradually in terms of making profit something generating more cash flow from the balance activities. So we have, our efforts on cash collections have good achieved a positive result that help reducing the -- improving the balance of the account receivables. And the third part, the third part is depends that we're still more to invite customers via e-commerce, via some of our website. So this e-commerce generated just that's cash prepaid cash at all before they use our service. So this all varies contributors have or improving management. So we will also take this margin in the future. We will maintain well cash positions. So we expect our operating cash flow will be -- keep this positive trend in the following couple of as of the year. I think we will -- I believe we will achieve better than last year that we expect.

By the way, because our customer situation, financial situation, also is much better compared to the -- during the pandemic. So they are willing to assess our better payment conditions.