uCloudlink Group Inc. (UCL) Q1 2022 Earnings Report, Transcript and Summary

Hello, and welcome to the uCloudlink Group Inc. First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jillian Zeng, Investor Relations of the Company. Please go ahead.

Thanks, everyone, for joining us on our first quarter 2022 earnings call today. This earnings release is now available on our IR website at ir.ucloudlink.com as well as via newswire services. I will give a brief introduction to our uCloudlink management team. Zhiping Peng is our Co-Founder and Chairman of Board of Directors; Chaohui Chen is our Co-Founder, Director and Chief Executive Officer; Yimeng Shi is our Chief Financial Officer; Zhu Tan is our Vice President of Marketing and Sales. Our CEO will begin with an overview of our Company and business highlights, which will cover Section 1 of the earnings presentation posted on our IR website. Our CFO, Yimeng Shi will then discuss our operation highlights and financial results as presented in Sections 2 and 3. Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve the known and unknown risks, uncertainties and other factors not under the Company's control, which may cause actual results, performance or achievements of the Company to be materially different from the results, performance or expectations implied by these forward-looking statements. All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the Company's filings with the SEC. The Company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions or otherwise, except as required by law. Please also note that uCloudlink's earnings press release and this conference call include discussions of 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.

Thank you. Page 4 to Page 12 are similar contents, as the earnings presentation of the first quarter of year 2021. We still encourage you to review the quarter one year 2022 earnings presentation uploaded to our Investor Relations website with some latest updates. Hence, I will now elaborate on the past similar with quarter four earnings result, but we are still focused on our most recent development in the fourth quarter. Please turn to Page 13. uCloudlink 1.0 is our international data connectivity services business, which has had a strong track record of high gross margins and profitability with ongoing growth potential. We have established an intelligent wholesale-to-retail packaging solution to minimize unit cost of data traffic, in that as data package of single operator or across mobile network operators, mobile virtual network operators are priced differently. This is attributable to our large SIM card pool and our ability to acquire data packages and local wholesale pricing from operators and partners. We further differentiate ourselves with our market network reselection and combination technologies, which could ensure high-quality data connectivity and improve user experience. uCloudlink 1.0 business monetization model includes retail to C, rental or selling to the end user; wholesale to B for business partners; and our PaaS and SaaS services, such as CRM, Billing management, devices, selling, and rental management, et cetera. For wholesale to B, we can act as a reseller or provide commission services to our business partners. We allowed our business partners to share data traffic pools through our PaaS and SaaS platform and charge a commission fee. During the first quarter of year 2022, our 1.0 business revenues has slightly increased by 2.2% compared to the same period in year 2021. As international travel restriction around the world continue to abate over time, the number of daily active terminal, DAT for the 1.0 business has increased during the first quarter of year 2022, indicating that more and more customers are using our products and services. With an increasing diversified geographic market compensation, we are positive that revenues from 1.0 business will steadily grow and exceed the pre-COVID-19 level in the future. We will continue to develop and enrich our 1.0 product offerings. Our goal as always is to provide the best quality products and services for our global customers, which ensure better international data connectivity. Let's move to the Page 14. uCloudlink 2.0 is our local data connectivity services business and has become a new driver of revenue growth since the year 2020. Its business monetization model is similar to the – of uCloudlink 1.0 with a massive potential local user base. Our new HyperConn technology contributed to the further development and growth of our uCloudlink 2.0 business. We have expanded the business scope of our local data connectivity services. Currently, our innovative HyperConn technology is widely accepted by mobile network operators and business partners in various industries with great growth potential, such as with local partners in China, U.S., and Japan. In the past quarter, we have continued to strengthen our presence in our existing markets, including Japan, North America, Southeast Asia where we have had operators improve their data services and solve the data connection problems through our PaaS and SaaS platform. We provide high-quality data connection for 5G applications in response to the increased demand for better connectivity services. Furthermore, as people get used to the new normal, our product and services provide better performing solutions for the remote work and learning, which require reliable connectivity as well. We adapt ourselves to involving market by introducing innovative products to address various 2.0 business applications scenario. During the first quarter of year 2022, our various IoT solutions, which have successfully start to gauge customers interest and being perceived as reliable and high-quality data connectivity services in markets like Japan and North America achieved further [indiscernible]. Our revenues from 2.0 business increased 185.4% compared to the same period in the prior years. Our customers were able to realize the reduced operating costs and improving data connectivity experience through this cutting edge IoT solutions and we continue to focus on the exploring new business prospect to serve a broader spectrum of partner with IoT needs. We expect our 2.0 business to grow with the support of our innovative cloud SIM and HyperConn technology as we continue to introduce our solutions, services and products to the market and strengthen our collaborations with the local partners. Let's move to Page 15. Based on our innovative cloud SIM and HyperConn technology solution, we continue to develop and broaden our portfolio of offerings with new products and services such as our first self-developed terminals and third-party devices. Our HyperConn technology solution has been well [indiscernible] and relative product, including industry Wi-Fi router, IP Camera, Power, emergency services, live broadcasting e-commerce and Autopilot, augmented reality and virtual reality, AR, VR and cloud computing, et cetera are gaining recognition proven by a growing user base across a wider spectrum of industries. In the first quarter of year 2022, we promote more innovative 5G products in countries and regions such as U.S., Japan and Europe. Furthermore, we have a leading Global 5G Roaming Solution, which is an easier roaming solution for carriers and we are one of few company that could provide 5G products with a global band and global roaming. These reflects our market confidence and continue efforts on elevating our user experience as this new product equipped with our innovative 5G technologies, marked not only the gradual recovery, but also a new beginning for our growth path in the post-pandemic era. In terms of IoT side, we apply GMI, GlocalMe Inside solution in IP camera commercially, and it has been promoted among multiple markets. Going forward, we plan to launch more of these types of innovative products and services. uCloudlink positions itself as a pioneer technology solution provider in the data connectivity market through our mature 1.0 business and the newer 2.0 business, uCloudlink is promoting the long-term development of the PaaS and SaaS ecosystems, which has been recognized by various business partners. [Indiscernible] increased revenue contribution by 7.8% in the first quarter of year 2022. Additionally, we have entered two new regional markets during the period. PaaS and SaaS platform is built upon uCloudlink 1.0 and 2.0 business lines and its growth reprice our ability to construct a healthy ecosystem. This requires our non-stop efforts in maintaining and expanding a strong partnership base, which includes mobile network operators, mobile virtual network operators, SIM card providers, our business customers and more will remain confident in our business development teams and to empower the building of our PaaS and SaaS ecosystem and in our research and development team to address diversify needs our customers has posed to us. In the remainder of year 2022, we expect PaaS and SaaS platform revenue to grow into more significant driver of uCloudlink business. And that continues to enlarge its marginal efforts and improve margin profiles. We are able to reduce operating expense and decrease the net loss through streamline our business operations, including optimizing labor cost compared to the fourth quarter of year 2021. Going forward, we expect to further lower operating costs as a way to improve our operating and financial performance. We believe that from the connected to better connections, uCloudlink is a significant driving force in the transformation of the increasingly advanced information area. We are committed to building a more connected future for more customers and users, and we strive to make a positive impact in serving and global user community. I will now turn it over to our CFO, Yimeng Shi, who will go through the business and financial highlights.

Thank you, Mr. Chen, and hello everyone. Let us turn to Page 17 for our business highlights. The left hand side of the slide shows daily active terminals, DAT as of March 31, 2022. Average daily active terminals in the first quarter were 273,870 of which 1,430 owned by the Company and the 272,442 owned by our business partner, representing an increase of 33.5% from 205,082 in the first quarter of 2021. Our uCloudlink 2.0 service accounted for around 69.5% of the total DAT during the first quarter of 2022. Average daily data usage per terminal was 1.74 gigabyte in March 2022. Let's all turn to Page 18, which shows global diversification of our business. We had around 26% of total revenue from outside Mainland China. During the first quarter of 2022, Japan contributed to around 40% of total revenue. For other countries revenue, the U.S. market had the largest contribution to our business with further development of our U.S. business, and we will continue to expand all the markets such as Europe, and Southeast Asia, et cetera. During the first quarter of 2021, we had 6% of total revenue came in from Mainland China, 58% of the total revenue came in from Japan, and 36% of total revenue came in from other countries and regions. Let’s all turn to Page 20. I will go through our financial highlights for the first quarter of 2022. Service-related revenue as a percentage of total revenue was 62.9% during the first quarter of 2022 compared with 47.4% during the first quarter of 2021. Revenue from local data connectivity service and PaaS and SaaS service increased 185.4% and 7.8% year-over-year, respectively. This increase was primarily due to the expansion in the number of our business partner that use our PaaS and SaaS services to provide local data connectivity service. Revenue from PaaS and SaaS as percentage of total revenue also increased to 15.8% during the first quarter of 2022 compared with 12.9% during the first quarter of 2021. Let us move to Page 21, which shows the revenue breakdown of our two business segments, mainly revenue from service and sales of products. Our total revenue decreased by 11.8% from US$17.7 million in the first quarter of 2021 to US$15.6 million in the first quarter of 2022. Due to the negative impact on local government in resurgences and subsequent lockdown in certain cities in China, including where our main manufacturer are based, which has impacted our revenue from sales of products. Revenue from service were US$9.8 million, representing an increase of 17.2% from US$8.4 million for the same periods of 2021. This increase was primarily attributable to the increase in revenue from local data connectivity service. Let’s turn to Page 22 for gross margins of our business. Our service gross margin increased to 49% in the first quarter of 2022 compared to 35.9% in the first quarter of 2021. And our overall gross margin was 37.4% in the first quarter of 2022 increased from 31.3% during the same period of 2021. The increase of service gross margin during the first quarter of 2022 was primarily attributable to the increase of our PaaS and SaaS service revenue and data connectivity service by [Indiscernible], those of which have higher gross margins over other business lines. Let us move to Page 23, which show the breakdown of our operating expenses excluding share-based conversations and others. Excluding share-based compensations, operating expenses as a percentage of total revenue was 60% in the first quarter of 2022 compared with 71% during the first quarter of 2021. We had further streamlined our business operation including optimizing labor costs, and our total operating expenses excluding share-based compensation were decreased to US$9.3 million in the first quarter of 2022 compared to US$12.6 million in the same period of 2021. Let’s now turn to Page 24. Operating cash flow was negative US$1.4 million during the first quarter of 2022, compared to negative US$6.7 million during the first quarter of 2021, our cash and cash equivalents and short-term deposits were US$11.2 million as at March 31, 2022. Our CapEx were US$6,000 compared to US$0.1 million in the same period of 2021. Let us move to Page 25. Net loss during the first quarter of 2022 was US$7.9 million compared to US$15.4 million during the first quarter of 2021. Adjusted EBITDA was negative US$3.9 million during the first quarter 2022 compared to negative US$6.7 million during the first quarter 2021. As mentioned above the company is working towards improving these bottom line results and financial positions. With that, let me conclude today's presentation. Thank you and we will start our Q&A session.

We will now begin the Q&A session. [Operator Instructions] The first question comes from Vivian Zhang with Diamond Equity Research. Please go ahead.

Good evening. This is Vivian Zhang from Diamond Equity Research. Thanks for taking my questions. So my first question is that can you give us some additional color on your Internet of Things solutions and its market opportunity?

Mr. Chen, can you answer the question?

Yes. For international business, we believe that we can see the stronger DAT, we can see – the first quarter of year 2022, we can see the data recovery. So DAT has increased. So that’s the data performance. From our product side, we know that only normal cloud SIM solution, now we have HyperConn solution. HyperConn means that we can provide much better experience for multi-network handover from the – more than ten second now can go to the millisecond, that's wonder of the new product, new service. And now is for 5G, we provide the 5G product. So we are now – already few vendors almost is only one vendor who can provide a global 5G network roaming. So because our 5G product with almost all countries, 5G radio band and also the 5G roaming capability that’s very rare in the industry. So all these preparations let us in a good position in a recovery of COVID-19 – after COVID-19, so I think we are in a good position.

Okay. I see. So my second question is regarding the COVID-19 impact because we've seen some Chinese cities like Shenzhen reopening in the second quarter after the lockdown, but there's some controls may still be in place in the cities. So do you think there will be some recovery in revenues from sales of products in the second quarter, or those controls continue to affect your launch and manufacturing of 5G products given that your main manufacturers are based in Guangdong China?

Yes. It is impacted in the first quarter, especially, both Shenzhen and Shanghai because this supply chain is not the part of our supply chain based in the Shenzhen. And some part of our partner is based in Shanghai. It is impacted by the lockdown during the COVID-19 in China. But I think we consider in Guangdong, it’s early recovery. I think the second quarter, it's not any problem from a current scenario. Also we removed some of our supply chain from Shanghai to Shenzhen. So in the second quarter, we believe impact from the COVID-19 will be almost disappear. I think average impact by the quarter one, quarter two we can see is much, much better, so that's one of the situation. Another is because our first quarter, our new device product delivery, it is impact because lockdown in the first quarter for manufacturer and also is come because this quarter, the first quarter of the revenue and delivery and the source order has come from the last quarter, quarter four. Quarter four has heavy impact by the Omicron variant COVID-19. So I think second quarter will be much better.

Okay. That's all. Thank you.

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

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

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