uCloudlink Group Inc. (UCL) Q1 2021 Earnings Report, Transcript and Summary

Good morning and good evening, ladies and gentlemen. Thank you for standing by and welcome to the uCloudlink Group Inc. First Quarter 2021 Earnings Conference Call. [Operator Instructions] I would like to turn the call over to your host today, Mr. Bob Shen, Deputy Investor Relations Director of the company. Please go ahead.

Thanks, everyone, for joining us on our first quarter 2021 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com, as well as via news wire services. Here, I'll give a brief introduction to our uCloudlink's team. Zhiping Peng is our Co-Founder and Chairman of Board of Directors. Chaohui Chen is our Co-Founder, Director, and Chief Executive Efficer. Zhigang Du is our Director and Chief Operating Officer. Yimeng Shi is our Chief Financial Officer. Xinquan Xu is our Chief Sales Officer. Our CEO will begin with an overview of our company and business highlights, which will cover section one of the earnings presentation posted on our IR website. And then our CFO, Yimeng Shi, will discuss our operational highlights and the financial results in section two and section three. Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control, which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entity by the cautionary statements, risk factors, and the details of the company's filing 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 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.

Yeah. Thank you, Bob. There are similar contents as to the earnings presentation of the fourth quarter of the year 2020. I will focus on Page 8, 9, and our recent developments on Page 14. Let's move to the Page 8. The definition of hyperconnectivity, basically, includes level one, which is the evaluation of connection quality of various wireless access network, including Wi-Fi 3G, 4G, or 5G; level two, which is network selection and optimization based on the Cloud SIM technology; and level three, which is optimizing and acceleration of application routing. Our Hyper-Connectivity solution would redefine the mobile network user experience and facilitate data traffic marketplace. Data connectivity user experience is affected by various factors such as signal interference and routing, bandwidth and delays, and the server location. We innovatively applied Navigation + Electronic Toll Pass concept over wireless network to our users and business partners in mobile data connectivity market via our Hyper-Connectivity technologies through PaaS and SaaS platform. We focus on establishing a stable, reliable, safe network connection with security for our business partners and users. uCloudlink's Hyper-Connectivity would aim to connect across networks and technology systems across various SIM form factors such as e-SIM and soft-SIM; across wireless physical boundary, such as Wi-Fi and various radio technologies, etc. by countries and by regions. We will achieve the goal by identification, monitoring, and optimization to further elevate user experience in the data connectivity market. Hyper-Connectivity technology such as millisecond multi-network reselection technology, we provide user application with better connection experience, which have real-life Navigation + Electronic Toll Pass. Hyper-Connectivity solution would guarantee safer connectivity and network security. We are a high-tech data connectivity service solution company dedicated to crossing and connecting with all global networks and technology systems, improving the user experience by optimization of all layers including access, routing, and the application layers. We will also officially release our new Hyper-Connectivity product and service in the near future. Let's move to the Page 9. Our innovative Hyper-Connectivity solution will provide industries and users with robust network connection. That means reliable, speed, and safe through PaaS and SaaS platform. We focus on establishing stable, reliable, safe, and efficient network connections for our business partners, operators, and users which is a fundamental requirement of the wireless network connection. Our Cloud SIM technology, such as smart multinetwork reselection has developed to the Hyper-Connectivity technology stage, which facilitates the realization of Navigation + Electronic Toll Pass across wireless networks. For industries application, Hyper-Connectivity solution is highly compatible with industries requiring high-quality data connectivity such as cargos and logistics, internet of vehicles, autonomous driving, AR/VR, 5G cloud computing, trains and yachts, emergency response, power monitoring, etc. Apart from the telecom industry, we will have more business opportunities in most industries. For users, Hyper-Connectivity solution can elevate data connectivity user experience, such as education, remote working, video, and the entertainment, home broadband, mobile broadband, indoor coverage, and reliable fixed broadband Wi-Fi coverage, etc. Our innovative Hyper-Connectivity technology guaranteed data connectivity and network security for various industries and users. Let's move to Page 14, which is the most important page, which shows the progress of the first quarter of year 2021 and updates of the changes we made. Despite the lingering impact from the COVID-19 pandemic, we record uplifted revenue of $17.7 million during the first quarter of 2021 versus the fourth quarter of 2020, in line with our quarterly budget. The launch of the 5G-related products and service, multi-network millisecond reselection technology, and the Hyper-Connectivity solution allows Navigation + Electronic Toll Pass to elevate users experience with better data connection and facilitate us to enter and expand to new industries requiring high-quality data connectivity such as education, remote working, and video, internet of vehicle, emergency response, electronic power monitoring, and surveillance industries. We expect that the technologies would help us acquire more users, establish cooperation with more mobile network operators mobile virtual network operators, and expand PaaS and SaaS ecosystem. In the Chinese market, we made progress through Hyper-Connectivity solution with mobile and the fixed broadband businesses, under various application scenarios such as home broadband and received positive feedback of our 4G/5G millisecond multi-network reselection technology. In Japanese market, we formed new alliance with one of the mobile network operators and plan to cooperate with business partners in education industry, which we believe will contribute to our continued growth momentum. In the U.S. market, we had fast growth and record a high sale of GlocalMe mobile Wi-Fi hotspots via Amazon for the past 12 months ending in March of year 2021. After winning the patent litigation and excluding patent-related interference, we applied for our innovative technology in the United States such as 5G millisecond network reselection and hyper-connectivity solution. In Europe, we invest in iQsim, the leading provider of open virtual SIM, VSIM, platform and VSIM-enabled mobile device based in France, which is an important component of our global investment. We will also officially release our hyper-connectivity product and service in the near future and are proactively exploring opportunities in new industries such as internet of vehicle and education. We expect that widespread vaccination will continue to increase recovery of cross-border activities and the international tourism, which we expect will benefit our 1.0 international business. Leveraging our innovative technologies, we will continuously develop our 2.0 local business and various IoT application scenarios with new industries which require high-quality data connectivity. I will now turn this forward for our CFO, Shi Yimeng, who will go through the business and financial highlights section.

Thank you, Mr. Chen. Hello, everyone. Let us turn to Page 16 for our business highlight. The data for the first quarter of 2021 shows that the impact from COVID-19 is becoming stable. Left-hand side of the slide shows daily active terminal, DAT, as of March 31, 2021. The uCloudlink 2.0 service, accounted for around 66% of the total DAT here in the first quarter of 2021. Average daily data usage per terminal was 1.98 gigabyte in March of 2021. Let us turn to Page 17, which shows global diversification of our business. Mainland China's revenue as a percentage of total revenues increased to 6% during the first quarter of 2021, compared to 5% during the fourth quarter of 2020. And then we had 94% of total revenue from outside Mainland China. During the first quarter of 2021, Japan contributed to 57% of total revenue and it continued to be the single largest market for our business. For other countries revenue, the U.S. market had the largest contribution to our business. In the first quarter of 2020, we had 19% of total revenue came from Mainland China, 53% of total revenue came in from Japan, and 28% of total revenue came in from other countries and the regions. Let us turn to Page 19. So we go through our financial highlights for the first quarter of 2021. Service-related revenue as a percentage of total revenue decreased from 52% in the first quarter of 2020 to 47.4% during the first quarter of 2021. The development of our local data connectivity service business through our PaaS and SaaS platform contributed to the demands of the sales of products. Revenue from PaaS and SaaS service increased 18.3% from $1.9 million in the first quarter of 2020 to $2.3 million in the first quarter of 2021. This increase was primarily due to the increase of business partner that used our PaaS and SaaS service to provide local data connectivity service. Revenue from PaaS and SaaS as percentage to the revenue increased to 13% during the first quarter of 2021. Let us move to Page 20, which shows revenue breakdown of our two business segments, namely revenue from service and the sales of products. During the first quarter of 2021, revenue from service and the sales of products accounted for 47.4% and 72.6% of total revenue, respectively. Our total revenue decreased by 47.2% from $33.5 million in a three month ended March 31, 2020, to $17.7 million in a three month ended March 31, 2021. Revenue from service were $8.4 million, representing a decrease of 51.9% from $17.4 million for the same period of 2020. This decrease was primarily attributable to the decrease in revenue from international and the local data connectivity service to a certain extent mainly because of the continuous and prolonged impact of COVID-19 pandemic. Our total revenue increased 3.9% compared to $17 million in the first quarter of 2020. Let us turn to Page 21 for gross margin of our business. Our service gross margin and overall gross margin were decreased to 35.9% and 31.3% in the first quarter of 2021, compared to 51.1% and 35.3% in the first quarter of 2020, respectively. The COVID-19 pandemic impact our service gross margin during the first quarter of 2021, and our overall gross margin was relatively stable during the past three quarters. Let us move to Page 22, which shows a breakdown of our operating expenses, excluding share-based compensation and others. Excluding share-based compensation, operating expenses as a percentage of total revenue decreased from 83% to 71% during the first quarter of 2021 compared with the fourth quarter of 2020. Also, R&D expense as a percentage of total operating expense increased to 29% in the first quarter of 2021, compared to 27% during the fourth quarter of 2020. G&A expenses accounted for 47% of total operating expenses, which consisted of expenses like professional service charge. Let us turn to Page 23. Operating cash flow was negative $6.7 million during the first quarter of 2021, compared to positive $6.7 million in first quarter of 2020. Our cash flow was normal with sufficient cash and cash equivalents as of March 31, 2021. Our CapEx was $0.1 million during the first quarter of 2021, compared to $1.0 million during the first quarter our 2020. CapEx as a percentage of total revenue decreased from 3% during the first quarter of 2020 to 0.6% in the first quarter of 2021. Let's now move to Page 24. Net income during the first quarter of 2021 was negative $15.4 million, compared to positive $0.2 million during the first quarter of 2020. Adjusted EBITDA was negative $6.7 million during the first quarter of 2021, compared to positive $1 million during the first quarter of 2020. With that, let me conclude today's presentation. Thank you. And then we start our Q&A session.

Yes. Thank you. We will now begin the question-and-answer session as mentioned. [Operator Instructions] And the first question comes of Vivian Zhang with Diamond Equity Research.

Hello, this is Vivian from Diamond Equity Research. Thank you, management, for taking my question. So we have seen COVID-19 third wave hitting globally, especially in India, Japan, and Southeast Asia since April. So my first question is how will this affect your overseas business? Will the company adjust to your international strategy and growth expectations for the second quarter? Do you provide any guidance on revenue or net income? My second question is could you please give us more color about your 5G-related technology and business? And will this -- will -- and how this will contribute to your future growth while overseas traveling is still down with too many restrictions? Thank you.

Thanks, Vivian. The first question regarding the impact of COVID-19. Yes, as we, you know, as only released and the -- we have impacted by the COVID-19 -- we -- so far. And so we expect that the implications of COVID-19 will continue through the years, the remainder of the year. So we think our other look business, we expect more came from the local connectivity service, local mobile broadbands demand. So their growth as a market mainly came from the Japanese market, which is the biggest drivers for growth in the first quarter of this year. And we believe that the main drivers of growth for the second quarter came from the Japanese markets as well. So for the second 5G-related, we have our CEO, Mr. Chen, to answer.

I'm Chen. Let me answer your 5G questions. Because we understand 5G radiofrequency is higher than the 4G. So that means that the same coverage like 4G, 5G need around four times space station number. That's a huge investment. So we understand although coverage maybe it's good. But most challenges indoor coverage because 5G in some places one to build a more viable to replace the fixed broadband. So indoor, how to improve the indoor coverage become a challenge. So that's a bigger question. Our hyper-connectivity technology will improve this part. So for example, like highway. One then is easy to block, and then maybe another carrier in this region to have coverage. So a different carrier may have different coverage. So in one location with a multi-network, we will improve the indoor coverage of plasma Wi-Fi. So Wi-Fi, 5G, 4G, and the available network indoor, we will reselect and evaluate the network. That means we can enable mobile phones, mobile cellular indoors and replace the phase often. That will happen. Let me answer, we will accelerate the 5G coverage and experience, especially in DAT. For the initial stage of the 5G number, the pre-paid number is so many, the coverage is poor. If we can let cross multi-carrier network for 5G coverage, we could improve the whole country, the whole 5G coverage. That means that we can accelerate the 5G to become popular. Currently, I think 5G's most typical application is enabled more by a cloud but the base needs good coverage for this to happen. So that's the first part. And the second part is the 5G roaming globally. So we understand 5G roaming is known to really stuck. For 5G, we haven't -- for 4G roaming, we have solved the problem, and 5G under the phase that's more challenging. So with our technology, we are changing more easily to land a 5G roaming to happen. For example, any device or handset embeds our hyper-connectivity solution processing inside. That means we can let this device use anywhere in the world of the 5G network without, you know, a complicated roaming barring. You just have to acquire a low-cost SIM card and wire our application then use the device -- can use the 5G network device. We create a new way for 5G roaming, simplify the 5G roaming. Another -- also, by the way, we can, you know, improve 5G roaming time latency. So we understand latency is a key point for people with 5G, not only with the people with 4G. The time latency is very important that enables 5G to apply to the cloud and AR/VR. You can imagine when you use the 5G, you know, roaming outside your country and then return to your country then go to the internet, the latency will become longer, and your AR/VR will become a problem again. So in this case, we are, you know, at the one page to have 5G not only in domestic but also for international application, especially for a time latency, we are a unique solution. So fundamentally, we believe that we are the accelerator of the 5G era. That comes early, at least, one year with our technology in the industry. So that's the product and we are really launching our 5G MiFi embed the handset with our hyper-connectivity solution and we will announce our hyper-connectivity solution in a 5G MiFi in the next month. And we have this solution around that we should announce.

Hi, Vivian. This is Bob Shen. Let me add some color to your second question because as we mentioned we continue to keep investing in our R&D, especially like 5G-related products. As our CEO just mentioned, like a 5G mobile Wi-Fi or like a 5G customer-premises equipment, CPE, and also together with our technology such as 5G millisecond multi-network reselection technology. And I think, we believe, that all these devices and all these innovative technologies will facilitate us to establish our leading technological position of our PaaS and SaaS platform in the early stage of 5G. Thank you.

Thank you. And the next question comes from Lisa Thompson of Zacks Investment.

Good evening. So I have a number of questions about the quarter. First off, I see that you had a very good improvement in product sales and the gross margin looks like it might have been a record high. What is causing that? Is that the first time you're shipping 5G devices? What happened in the quarter?

The gross margins in the first quarter -- as we -- the overall gross margin we disclosed is stable the past three months. And during the sale of products, we sell these to Japanese market. So that's the pricing and the product sales to Japanese markets are good. And so we have a good, a stable gross margins related to the product selling to Japan. For service gross margin [Later changed by the Company to 'The service gross margin is about 30%'], it's plus 80 with the mixtures of the service category and depending on the proportions and how much sales and service came from the local community service, how much is the service came from the PaaS and SaaS, and etc. The PaaS and SaaS service is higher gross margins turned in seconds. So when the more PaaS and SaaS service looking into an account then this will give us improvements to our gross margins in the future as we expect. And so when this -- when we -- the national service is recovered, when the vaccination progressed across countries, and the national roaming service is the highest gross margin as well. So our service gross margin will be improved when we have more service came from PaaS and Saas or came from investment roaming service. Hello?

Yes. And with that…

Yeah, I think, Lisa…

Go ahead.

Apart from the Japanese market, as our CFO mentioned, we are also enhancing our e-commerce efforts in other strategic key markets with high growth potential such as the United States and Europe. And one example, our CEO just mentioned that we recorded a high sale in the United States and we also optimizing and improving our website, streamlining our sales function in the local markets to improve -- to continuously improve the user experience and overall satisfaction. That's basically what we do.

So the 1.3 million incremental in product, is that U.S. and Japan? Like where did that come from? 5G or where is it?

Yeah. I want to answer your question because 5G is a new product that was just newly launched in this quarter, so the volume is really small. So having to show a bigger contribution to our margin, we believe in the following quarter following the 5G revenue increase, we believe the margin was higher than 4G. Of course, that's the -- because in 5G, no matter the data on the device, it is more expensive than 4G. And we believe in the following quarter, once the 5G revenue share percentage increase, revenue will be better. That's one reason. Another reason is that PaaS and SaaS, we have other reason of the SIM card and the traffic packaging, you know, we have been efficient. So how to more efficiently use the SIM card and not data package for sharing, it's another way we can increase our margin. So we believe our technology is important in 5G and the other reason is we have to increase margin in the future.

That helps. I was wondering if the 5G was brand new this quarter. What's your feeling on services? It was down again sequentially. Is that going to the bottom anytime soon? Are we going to see sequential improvement there?

Sorry, could you repeat your question, please?

Right. Services revenues were down again sequentially. Has that bottomed yet? Do you expect that to improve next quarter or is it going to decrease again?

The service revenue is, yeah, struggling, you know, there's a lingering COVID-19 impact. And part of that -- the positive thing is our PaaS and SaaS source of revenue is increasing, has been increasing. That's a consistent business model in local market. So we provide PaaS and SaaS platfrom to our local business partners who use our platform. But then they are purchasing local data from local carriers, so they don't purchase local data from uCloudlink. We only have some revenue sharing charged to local business partners. That's something times 10% around their service revenues. The gross margins are good. And this -- on the other side, is our service -- our service revenue has not increased so much as our business partners. So we expect that in the following quarters, I think our -- service revenue will a little bit slow to increase, will have to give us more products to our business partners and more partner connects to our PaaS and SaaS platform. So that's -- we believe we are improving our revenue mix in the future.

So do you think in Q2 service revenue will be over 8.4 million or not?

Yeah, something similar. Yeah, something similar that we -- but the driving maybe more came from -- we're selling more product to our business partners.

Okay. And as far as operating expenses, now, for the last two quarters, you've had between $5 and $6 million in stock-based compensation. Should we expect that every quarter?

The second quarter's share-based compensation is -- compensations are not -- I think, is smaller than the first quarter's. Yeah, and is not a big chunk like the first quarter's amount. But we do have upgraded share-based compensation in the following quarters.

So, what should I put in for that? You know, $4 million a quarter, or what do you expect going forward since that's, you know, something under control?

Yeah. I can share this information with you after this conference call. Is that okay?

Sure, okay. All right. I guess my last question is you originally thought this year you could do $107 to $130 million for the year. Are you still comfortable with that? Or should we ignore those numbers?

So far, we -- as we disclosed our guidance for the second quarter is $18 million to $19 million for the second quarter, and we still keep this guidance. For the full year, the range is $107 million to $130 million. We will review that to this -- this projection for the full year on a quarterly basis. So, we will adjust it for you when we have a change in the next quarter or something.

Okay great. Thank you. I just wanted to check on that. Thank you. Those are all my questions.

Sorry, I can't answer your question regarding the SBC for the second quarter. It amounts roughly to $1.8 for the second quarter's SBC.

Okay. And should I throw that in for Q3 and Q4 also, or we don't know?

I will answer you this Q3, Q4. So, we'll get that later on back to you later if okay.

Okay great. Thank you so much.

Thank you. [Operator Instructions] And the next question comes from Kong Gao with Tigress Financial Partners.

Good morning. This is Kong Gao from Tigress Financial Partners. I think most of my questions have been answered. So, two additional questions. So, can you give us any updates on the strategic cooperation with China Vehicle? And next question will be like if you can bring more colors on the new strategic alliance with Japan MNOs in the education industry. That's it.

Chinese company of vehicle -- Chinese Vehicle company is just under the financial reorganization process. So, we are waiting the finish of this process and we will start our delivery of our contracts with them. Second question is about the Japanese market, right? What about Japanese -- so, in Japanese market, we have the cooperation with the first Tier 1 telecom operators, and we have a contract with them. And responsibly, we will deliver -- we will have our delivery plan for them starting from Q3 for education-type products.

Yeah, with our focus for hyper-connectivity. And, you know, with also operating with and picking for, you know, for mobile Wi-Fi and handset.

Thank you. And the next question comes from Hunter Diamond with Diamond Equity Research.

Hi. Good evening. So, I just have one more question. I think a lot of it was answered by the previous analysts and investors. Can you discuss the internet of vehicles and education? Anything you can tell us on what those products might be, who the competitors would be in those sectors, or is it still too early to kind of give any additional guidance on that? Thank you.

Yeah. So, we had a follow-up, you know, because in the way we provide the, you know, high, you know, reliable connectivity with call -- we apply the, you know, hyper-connectivity, you know, solution for IoT industry. So, these are quite unique, you know, because, you know, most are like a vehicle, you know, autonomous -- autopilot like a, you know, in the power monitoring industry. So, they need a, you know, very reliable connection. So, in this industry, and also as I just mentioned for the emergency response situation, so for all this industry, we get a very positive, you know, feedback. And we have more and more, you know, current contract we've signed with them in the near future. So, you know, there's a lot of cooperation with Japan in the recent past, yeah. So, let's call it positive feedback. We believe in that the future, like 5G for industry, 5G for, you know, autopilot is also just a big opportunity for us. Another industry requires, you know, high reliable connectivity, we call it remote working and education because our solution can not only just let the -- make a Wi-Fi more reliable when your Wi-Fi become broken or become, you know, interrupt, so our 4G/5G will automatically backup. And this will -- and also this 5G/4G is close all available network not only just one carrier. So, all, you know, carrier available, we will support, you know, Wi-Fi together, become -- let Wi-Fi become more robust, so we can enable your device such as a tablet, your laptop during remote working, and the education period become more reliable. And that's a huge leap for this industry. We already approached some, you know, tier -- some industry, you know, leading, you know, Silicon provider. So, they like -- they do like R&D solution so we can provide the best connection and data mobile Wi-Fi. This unreliable connection becomes reliable, especially during your router -- your Wi-Fi router and your device, you know, in a sand dune, that becomes hard, and our solution could solve this problem perfectly. So, that's why we sell not just traffic, we sell this guarantee, a quality connection for this industry. So, we've become more and more popular in this industry. So, for this solution, we haven't seen a competitor yet. So, we live in this technology, we will launch this hyper-connectivity, you know, solution in the near future or in -- just in next month or so. So, under this solution, we have both applied in our 5G/4G, and all our solutions. And these are -- we're including the Level 1 in the physical layer, we will charge that device, enable the device with our hyper-connectivity application, where that device, you know, charge all available network with Wi-Fi, 4G/5G and we will select the, you know, the best one, and then the application work in first. And second, we will evaluation the quality of network and reselection -- use our milli-second reselection to choose the best of one or two to support your connection and your application. And finally, we're also improving the loading acceleration, because we understand that -- your tablet application and between your tablet application or your handset application to the server, potentially near, at least. So, we can find the best loading acceleration of the IP loading. For Level 1, Level 2, Level 3, we can make -- you know, your connection becomes, you know, fast, reliable, and become more, you know, robust. So, that's quite a unique solution. We can say from the fourth generation we call, cloud SIM, so that's a -- we can select network, but time needs around 20 to 30 seconds. Then last year, we, you know, you know, launched our millisecond-enabled device switch between different net -- available networks, just milliseconds. And now, in the middle of this year, we will launch our hyper-connectivity solution that not only in the physical layer and second layer, also is the loading layer to make your application, you know, more reliable and more faster, and secured. So, that's a unique solution. So, we created a new kind of, you know, a solution creator.

Great. Thank you very much for the additional details and congratulations on the quarter.

Thank you. [Operator Instructions] All right. Since there are no questions at the present time, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing comments.

Thank you once again for joining us today. If you have any further questions, please feel free to contact uCloudlink's Investor Relations through the contact information provided on our website or TPG Investor Relations.