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

Good day, and welcome to the uCloudlink Group, Inc. Second 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. Please go ahead.

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 and via newswire services. I will give a brief introduction to our uCloudlink management team; Mr. Zhiping Peng who is our Co-Founder and Chairman of Board of Directors; Mr. Chaohui Chen who is our Co-Founder, Director and Chief Executive Officer; Mr. Yimeng Shi who 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. 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 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 or 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 include discussions of the unaudited GAAP financial information and 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.

Thank you, Jillian, 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 USD 22 million, a 21.9% increase from the prior year period. And the average daily active terminals continues to increase and once again reached a record high of over 310,000. During the second quarter of year 2023, revenues from uCloudlink 1.0 International Data Connectivity Services business, what we call uCloudlink 1.0 business, increased by 32.5% year-over-year to USD 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 outbound travel from China remained somewhat limited in the first half of year 2023. Chinese tourists, utilizing Roamingman brand services here have contributed an increasingly considerable 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 recent developments in our 1.0 business. In July year 2023, we launched the GlocalMe SIM card. This SIM card is backed by our patented Cloud SIM technology, which allows our customers to freely purchase and use multiple global data plans as needed. As of launch, this GlocalMe SIM covers 10 major destination countries, including Japan, the United States, Australia, and we expect to gradually extend its availability to additional countries and regions. In addition, we are launching a pilot sale of GPS tracking-enabled roaming portable Wi-Fi terminals that we believe will be the smallest one in the world. The innovative product range cover portable Wi-Fi, GPS tracking-enabled roaming terminals and the GlocalMe SIM card add to our ever-expanding uCloudlink 1.0 business portfolio of offerings through which we help global users to achieve a leading zero roaming experience in various application scenarios to satisfy their cross-border data demands, driving comprehensive competitive advantages 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 serve as a key growth driving to the future. UCloudlink 2.0 Local Connectivity Services business, what we call uCloudlink 2.0 business, maintained continuous development, which report USD 2.2 million in revenue, up by 23.1% from USD 1.8 million in the second quarter of the year 2022. During this quarter, our upgraded Customer Premises Equipment, CPE, was tested commercially. This product enabled a seamless transition between fixed and mobile network, serving as a substitute for traditional fixed line broadband 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, what we call FBB market. What I discussed just now outlines our Data Connectivity Services business. I would like to highlight uCloudlink's PaaS and SaaS solutions, which is a line of business where we see great attention. On the IoT side, uCloudlink's IoT module will begin to be commercially embedded into the devices of a major mobile network operator in Japan within year 2023, making a significant expansion into IoT application scenarios. Adding to the embed IoT module, the GPS tracker-enabled roaming portable Wi-Fi terminals an upgraded CPE. This offering will generate recurring PaaS and SaaS services revenues apart from data connectivity services revenue and serve as product. We look forward to applying our PaaS and 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 continue to prepare for the full initiation of our one-stop 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-stop marketplace app, which will enable us to attract more users and customers beyond their users a bit -- beyond the users of portable Wi-Fi step by step. We remain confident in our team's capabilities to launch the app in the near term. In conclusion, we are pleased with the progress we have made 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 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 USD 23.5 million to USD 24.5 million, representing an increase of 29.1% to 34.6% compared to the same period of year 2022. We will continue playing 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 live a more convenient and intelligent life from connected to better connection. I will now turn the call over to our CFO, Mr. 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, out of which 7,386 owned by the company and 311,392 owned by our business partners, up by 9% from 292,432 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 USD 22 million, representing an increase of 21.9% from USD 18 million in the same period of 2022. Revenues from service were USD 14.1 million, an increase of 25.2% from USD 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 regions 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 services. Overall gross margin was 44.9% in the second quarter of 2023 as compared to 44.1% in the same period of 2022. Gross margins on service was 58% in the second quarter of 2023 as compared to 56.2% in the same period of 2022. Excluding share-based compensation, total operating expenses were USD 3.3 million or 33% of total revenue in the second quarter of 2023 as compared to USD 7.3 million or 41% of the total revenue in the same period of 2022. We reduced net loss significantly to USD 0.9 million in the second quarter of 2023 compared to a net loss of USD 6.3 million in the second quarter of 2022. Adjusted EBITDA non-GAAP improved to USD 2.1 million during the second quarter of 2023 as compared to negative USD 1 million in the same period of 2022. We achieved positive operating cash flow of USD 3.4 million during the speaking quarter of 2023 as compared to USD 2.5 million during the same period of 2022. We successfully achieved positive cash flow from operations for our 3 consecutive quarters, accumulating operating cash flow of USD 13.9 million through the 5 periods. In the second quarter of 2023, we continue to improve our financial performance, and we believe that we are well positioned to execute on our growth initiatives. With that, operator, please open up for Q&A.

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

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?

So your question regarding the second quarter revenues compared with the first quarter of 2023, that's your...

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?

Yes. So I think there are two reasons it happened. One is because COVID-19 is all over the world including China, Japan, Southeast Asia. So the first quarter just -- for China, the first quarter just opened. So everything is still and it's not at fast growth and that's why -- the first reason is because COVID-19 is over. And the second is worldwide of our customers prepare for summer season. So these 2 reasons made the equipment growth.

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 the GPS info feed into the SIM card selection?

Sorry, can you repeat your question?

Yes. The GPS tracker-enabled portable terminals. The GPS tracker in there, is that to prevent the terminal from being stolen or does the GPS -- does the information from the GPS feed into the SIM card selection?

Yes. Let me answer, Theo. We just 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 around 40 grams, that's smaller than a business card. So it's convenient, it's small, portable Wi-Fi and multifunction with GPS tracking, SOS function. Why we launched this kind of product is because we try to let people understand not only for connection, but because our multi network Cloud SIM technology and HyperConn will enable people to get faster 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. All the lost -- all the GPS information is easily to be -- via our 4G sent back to the server and let the people can find the lose material or the people who lost and easy to SOS for -- to get that asset -- to ask help. So that's the reason we are now expanding our business strong connection to the people who need better coverage and need this tracking and help requirements.

[Operator Instructions] Our next question comes from Vivian Zhang with Diamond Equity Research.

Congratulations on the nice quarter. I have 2 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's spending will be focused more on the marketing side?

Yes. Vivian, you have -- the figures tell us how we are managing our headcount relevant cost and also other business driven expenses as well. Yes, for R&D, we're managing tightly on the increased headcount. 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 R&D, headcount is not increasing as revenue growth expectations. But on other side, as you saw, our sales and marketing sector expenses compared with the last year period was increasing. This came from 2 drivers, one is sales guide, the headcount sales guide increased compared to last year. As we explained, Roamingman brand services contributes a lot of revenue for Chinese outbound tourists. So our headcount for the China Mainland's business increased. But all this headcount increase is in our budget. And so that's reflecting our growth, and we control our budget in line with growth activities.

Yes. Let me add 2 more comments. I think our Q2 major revenue still comes from our traditional products, but especially for our 5G product, that's quite popular, because we are the only one currently launching 5G worldwide connection. This is quite popular and generates good revenue. But more than the traditional product, in the second quarter, we launched 3 new products. That means our R&D capabilities is very stronger. So we in one quarter launched 3 new products, and these new products at the end of the second quarter. And I think in the next 2 quarters and the next year will help us win more revenue and users. These 3 products, I think, you can see is about our GlocalMe SIM first, and second is our high reliable CPE, upgraded CPE, and that can enable enterprise office and home to get a high-reliable network, to secure their fixed network, no drop for this after recovery. So the last one, we just launched the smallest card size checking and Wi-Fi product. And this product can go to the daily lives of people. So all these 3 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 these new products I just mentioned in the following quarter and the next year will generate more revenue and users for us. Thank you.

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 revenue from China increased a lot this quarter. Can we expect this growth momentum to continue?

Yes, 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 this is a peak season for summer holiday and yes, same for Chinese outbound tourists. So summer holiday is peak time for this year. So we expect the growth momentum came from international travel, this pickup time. So that's the main driver for our gross revenue in the third quarter and also will contribute to improving our service gross margins and contribute to our strongest financial position in terms of operating cash flow and this adjusted net income.

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 recovered 30%. So you can see it's smaller, compared year before COVID-19, only 30% recovery. So people -- the government forecasts during the next holiday, like National Day, we will go to 50% around this figure, almost another bigger group. Another reason we understand because of the visa issue and the passport issue during COVID-19, so we haven't seen a big increase from the Chinese people. Even this smaller percentage already gave us a good revenue. We believe once the visa is open and the passport is open, and opening of the boundary become more -- this barrier will overcome, I believe in the third quarter and fourth quarter, we will get a much better revenue from the China market for Roamingman brand.

Our next question comes from Yanxin Li with Great Wall Securities.

This is [ Stehpanie ] from Greater Wall Securities. I have a question about PaaS and SaaS services because we see the revenue of this PaaS, like it doesn't have obviously increased compared to the first quarter. So I want to know maybe the process of the PaaS and SaaS service development at this time?

Yes. So you see in the second quarter of '23, our service revenue segment increased significantly with a mix of 3 main types service revenues; international roaming connectivity service, local connectivity service and PaaS/SaaS service. Among the 3 categories, roaming service is the increase, number one, in terms of growth rate. And PaaS/SaaS is in third place in terms of growth rate, but there's growth as we report our daily active terminal in the second quarter reached a historical record high 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 3 main business models, one is the B2C retail business model and the second is B2B2C wholesale business model and third one, PaaS/SaaS platform. So it depends our business partner choose which business models is suitable for them. So if people choose B2B2C wholesale business model in roaming sectors, so we will have more roaming service generated from this commercial term. And we don't -- sometimes, we don't double-charge wholesale package 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 have disclosed as well, we launched 3 products in this quarter. GlocalMe SIM card and this smallest Wi-Fi -- portable Wi-Fi with the GPS tracker function and IoT modules delivered to a main operator of the -- mobile network operator in Japan. So this IoT module 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're managing our performance in terms of overall of 3 main categories of service sector.

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

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

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