uCloudlink Group Inc. (UCL) Q2 2022 Earnings Report, Transcript and Summary

Hello, and welcome to the uCloudlink Group Inc. Second 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 today’s event is being recorded. I now would like to turn the conference over to Jillian Zeng, Investor Relations. Ms. Zeng, please go ahead.

Thanks, everyone, for joining us on our second quarter 2022 earnings call today. The 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 the 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 the 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, Jillian. Page 4 to Page 12 are similar contents, as the earnings presentation of the first quarter of year 2022. We still encourage you to review in the second quarter of year 2022 earnings presentation uploaded to our Investor Relations website with some latest updates. Hence, I will now elaborate on the past similar with the [first quarter] [ph] of year 2022 earnings release, but we are still focused on our most recent development in the second quarter. Let's move to our 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. During the second quarter of year 2022, our 1.0 business revenues have increased by 40.1%, compared to the same period in year 2021. As international [travel] [ph] restriction around the world continue to abate over time. The number of average daily active terminal for the 1.0 business has increased during the second quarter of the year 2022, compared to the second quarter of the year 2021, average daily [active] [ph] terminal has increased by 23.6%, a testament to the faster recovery of our 1.0 business, which indicates that more and more customers are using our products and services. With our innovative global 5G roaming solutions, we hope to strengthen our leading technology addition in providing reliable high quality international data connectivity services in more than 140 countries, powered by our PaaS and SaaS platform enabling single operator entry point to assess more than 300 global mobile network operators, a web network. We remain positive about ongoing recovery and growth of global tourism demand and expect revenue from 1.0 business to [steadily grow] [ph] and [indiscernible] level in the future. 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. It’s growth is built upon our efforts in exploring market opportunities such as the cost of pandemic and new normal lifestyle that people are getting more and more used to. The development of 5G applications and in the IoT area, our ability is to improve network convergence, data connections, cooperation with intelligent hardware manufacturers to [indiscernible], etcetera. In the past quarters, we have continued to strengthen our presence in our existing markets, including Japan, North America, Southeast Asia, where we help operator and business partners [improve their] [ph] data connectivity services and solve data connection problems through our PaaS and SaaS platform based on our patented technologies, including cloud SIM and HyperConn technology solution, will assess our step [indiscernible] evolving markets by introducing and upgrading in our [waiting product] [ph] to assess various 2.0 business application scenarios. During the second quarter of year 2022, our various IoT solutions such as industry WiFi loaders, IP cameras, has gained increasing recognition in various markets, actively extending our footprint into a more industry, including power, emergency services, autopilot, etcetera. This is reflected by a 52.6% increase in the 2.0 revenue during the second quarter of year 2022, compared to the same period in the prior years. Our customers were able to realize and reduce the operating costs and improved their connectivity experience through the cutting edge IoT solutions and we continue to focus on exploring new business prospect to serve a broader spectrum of partners 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 offering with new products and services. Such as our self-developed terminal and third-party devices. In the second quarter of year 2022, we continue to promote our existing portfolio of innovative 5G products in countries and regions such as the U.S., Japan, and Europe. We are now one of the few companies led to provide 5G products with a global radio band. In terms of the IoT side, the IP camera, which was a price with our GMI solution, less we launched commercially in the fourth quarter of year 2022 has now been promoted in the international market and received global recognition with innovative technologies [indiscernible] a level, high quality and innovative mobile data connection for the devices. Going forward, we plan to launch and provide more of these types of innovative products and services. uCloudlink positions itself as a pioneer technology solution provider in the data connectivity market based on the mature 1.0 business and newer 2.0 business, which is more a long-term development of the PaaS and SaaS ecosystems, which has been recognized by various business partners. We remain confident in our business development teams to empower the building of our PaaS and SaaS ecosystem, as in our research and development teams to address diversified needs our customers hope to ask. In the coming quarters, we expect PaaS and SaaS platform revenues to grow into a more significant drive of our business, and continue to enlarge its marginal effect and improve margin profiles. We are more than pleased to announce that our total revenue reached $80 million during the second quarter of the year [2002] [ph], which has slightly above our preview projection range due to a faster than expected recovery of international data connectivity services and development of local data connectivity services. We successfully achieved a positive operating cash flow for the fourth quarter since the second quarter of year 2020 during the COVID-19 pandemic. We are confident in our financial and operation position to see better result in the future. We [believe that] [ph] from connected to better connections, uCloudlink is a significant driving force in the transformation of increase in advanced information area. We are committed to building a more connected future for more customers and users we have tried to make a positive impact in the service 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. Hello, everyone. I will quickly go over our business highlights for the quarter ended June 30, 2022. Average daily active terminal for the second quarter were 292,432, including 1,223 owned by the company and 291,209 owned by our business partners, representing an increase of 23.6% from 236,553 in the second quarter of 2021. Our uCloudlink 2.0 service accounted for around 68% of total DAT during the second quarter of 2021. Average daily data usage per terminal was 1.58 gigabyte in June 2022. Next, I'll turn to Page 18, which show global diversification of our business. We had around 99% of total revenue from outside Mainland, China. During the second quarter of 2022, Japan contributed to around 38.1% 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 other markets such as Europe and Southeast Asia, etcetera. During the second quarter of 2021, we had 8.3% of the total revenue coming from Mainland, China. 32.6% of total revenue came in from Japan and 39.1% of total revenue came in from other country and the regions. Next, I’ll turn to Page 20. So, I will go through our financial highlights of the second quarter of 2022. Service-related revenue as a percentage of total revenue was 62.5% during the second quarter of 2022, compared with 48.5% during the second quarter of 2021. Revenue from international data connectivity service and local data connected service increased by 48.1% and 52.6% year-over-year respectively. This increase in revenues from data connectivity service was mainly attributable to our gradual recovery of international travel and the continuous development of our local data connectivity service business. Next let’s move to Page 21, which shows the revenue breakdown of our two business segments, mainly revenue from service and sales products. Our total revenue decreased by 6.3% from $90.2 million in the second quarter of 2021 to $18 million in the second quarter of 2022, primarily due to a decrease in sales of data related products and others. Revenue from service were $11.2 million, representing an increase over 20.7% from 9.3 million for the same period of 2021. The increase was primarily attributable to the increase in revenue from international data connectivity service and local data connectivity service. Next, let’s turn to Page 22 for gross margins of our business. Our service gross margin increased to 56.2% in the second quarter of 2022, compared to 45.4% in the same period of 2021. And our overall gross margin was 44.1% in the second quarter of 2022 increased from 28.1% during the same period of 2021. The increase of service gross margins during the second quarter of 2022 was primarily attributable to highest margin profile from international data connectivity service. Let’s now 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 41% in the second quarter of 2022, compared with 61% during the same period of 2021. We had further streamlined our business operation, including optimizing labor costs, and our total operating expenses, excluding share-based compensation decreased to $7.3 million in the second quarter of 2022, compared to $11.8 million in the same period of 2021. Next, I’ll turn to Page 24. Operating cash flow turned positive during the second quarter of 2022 and was $2.5 million, compared to negative $6.1 million during the same period of 2021. This is primarily a result of [our ongoing efforts], improved margin profile, and a controlled operating expenses. Our cash and cash equivalents and short-term deposits were $12.2 million as at June 30, 2022. Our CapEx was $0.2 million, compared to $0.3 million in the same period of 2021. Let us move to Page 25. Net loss during the second quarter of 2022 was $6.3 million compared to $8.2 million during the second quarter of 2021. Adjusted EBITDA was negative $1 million during the second quarter 2022, compared to negative $5.5 million during the second quarter of 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.

Yes, thank you. [Operator Instructions] And today's first question comes from Vivian Zhang with Diamond Equity.

Good evening. This is Vivian Zhang from Diamond Equity. Thanks for taking my question and congrats on the progress you made this quarter. So, my first question will be about the gross margin. We saw the gross margin on both services and sales of products increasing this quarter, so, I would like to know what's the reason for the increase? Will you continue to maintain the gross margin at this level in future quarters? Thank you.

Yes. Thanks, Vivian. Yes, regarding the gross margins improvement in the second quarters, first of all, there's a gross margin on service. That's a massive improvement, compared with the same period last year. As we explained in the earnings release, our revenue generated from the national data connectivity service increased a lot, compared with the last years. The gross margins related to the international data connectivity service is much higher than like a local data connectivity service, and that's the major contributions to an improvement of service gross margins. We expect the international travel is in the recovery and the most countries, more and more countries open the door to that to the traveler. So, we expect in the future, we have generated more revenue from international data connected service. So, we expect our service gross margin will keep this similar level and it will be [improved] [ph] in the future, once we have more revenue come from international data connectivity service. And also, the second contribution related to the product, yes, our product gross margin is improving as well, mainly due to the mix of product sales related to high-end product selling like 5G's [relative] [ph] products to the market. Yes, this year, this is a quarter, we delivered massive product – 5G-related product to the market. And we expect this trend will carry on in the following quarter and years? Thanks.

Yes. So, I have some more comments about – sorry, I have more comments about this point, because –in the R&D side, we also put a lot of effort to improve our margin, improve our [operations] [ph], and the efficient of our data usage and the combination. And this also increased our margin capability. Another factor is, we are now some new design and some replacement of the – to optimize the hardware to improve our, more the profitability of our hardware and data connection together.

Okay. I see. Thanks for that. So, my second question is that can you elaborate on the partnership you published in the second quarter and how shareholders should build this development? I mean, the partnership with [indiscernible]?

So, which two partner? Yes.

Yes, for partnership with [indiscernible] you published.

Okay. Yes. Last year, we have signed [indiscernible] values our technology to improve efficient and connected quality in the IoT area. So it's just [a friend – a contract] [ph] and it's just a starting point. We believe, in the future, we have more partner because – to recognize our technology because our headcount technology not only in full coverage of IoT device, but also lower cost of operation cost because market network [indiscernible] reliability of IoT network connectivity. That's very useful to the IoT area. So, we hope in the future with [more this] [ph] kind of partner can – working with us. For example, as you understand in our presentation, so we already imbed our service into the IP camera, IP loader, so – and also now apply into autopilot. So, we believe the [indiscernible] for better condition and lower operation cost is the [baseline] [ph] of our IoT application, less for cooperation partner similar like [indiscernible], this kind of partner. That's just a start point. And now we have more partner in this area. That’s for first one. For second one, we're working with the Ctrip because you can see now that global [tours and travel] [ph] is recovering. Before the COVID-19, we are already a big partner working with Ctrip. So, because we are the biggest channel and for mobile WiFi hotspot rental in China wireless channel. So, now we are prepared for recovery of COVID-19. So, now we are not only prepared for [recovery] [ph] in China, but in U.S. in the Southeast Asia, we have more [deep cooperation] [ph] to prepare for the people recovering from the global travel this scenario.

Okay. Got it. That helps. Thank you. Okay. That's all my questions. Again, congrats on the quarter.

Thank you. [Operator Instructions] All right. At this time, I would like to return the conference to Jillian Zeng for any closing comments.

Okay. There are no further questions. Okay. Thank you once again for joining us. If you have further questions, please contact our Investor Relations or contact our Investor Relations firm, The Equity Group.

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

Thank you.

Thank you.