uCloudlink Group Inc. (UCL) Q3 2022 Earnings Report, Transcript and Summary

Hello, and welcome to the uCloudlink Group Inc. Third 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 now would like to turn the conference over to Jillian Zeng, Investor Relations of the Company. Please go ahead.

Thanks everyone for joining us on our third 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 a overview of our company and the business highlights which will cover section 1 of the earnings presentation posted in our IR website. Our CFO, Yimeng Shi, will then discuss our operational 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 provision 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 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, change in the 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 have similar content as the earnings presentation of the second quarter of year 2022. We still encourage you to review in the third quarter of year 2022 earning presentation uploaded to our Investor Relationship website with some latest updates. Hence, I will focus on them on our most recent developments in the third quarter. Let’s move to the 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 on-going growth potential. During the third quarter of year 2022, our 1.0 business revenues has increased by 30.1% compared to the same period in year 2021. The revenue of our 1.0 business in Japan and Southeast Asia market increased significantly and in Mainland China market recovered slightly during the third quarter of year 2022 year-over-year. International travel distribution around the world continue to abate over time across our major international market with North America opening followed up by Europe and later Southeast Asia. One of our key markets, Japan has also recently announced the lifting of restriction for foreign travelers effective last October. Consequently, the number of average daily empty terminal for the 1.0 business has increased during the third quarter of year 2022 compared to third quarter of year 2021. Average daily activity terminal for our 1.0 business has increased by 25%, showcasing the accelerated recovery of demand of the uCloudlink high quality information as data products and services. Currently, we are providing reliable and 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 of our network. Going forward, I will remain positive that our 1.0 business will continue to be the key growth driver of our revenues, as well as bottom line results. Let's move to page 14. uCloudlink 2.0 is our local data connectivity services business and has become a new source of revenue growth since the year 2020. Its growth is built upon our efforts in exploring market opportunities such as the post-pandemic new normal lifestyle. Less people are getting more and more used to. The development of 5G applications in the IoT area, our abilities to improve network conversions and data connections, the cooperation with intelligent hardware manufacturers to implement GlocalMe Inside, etcetera. In the past quarters, we have continued to strengthen our presence in our existing markets, including Japan, North America, South Asia, where we help operators and business partners improve their data connectivity services and solve data connection problems through our PaaS and SaaS platform based on our patent technologies, including CloudSIM and HyperConn technology solution. As we share in our latest quarter in our last quarter, we take pride into our ability to adapt ourselves to the evolving market by introducing and upgrading innovative products to address various 2.0 business application scenarios. Our 2.0 business revenue reported 38.7% increase during the third quarter of year 2022 compared to the same period in previous years. Our customers are able to realize reduce operating costs, and improve data connectivity experiences through these cutting edge IoT solutions. And we continue to focus on exploring new business prospects to serve a broader spectrum of partners without the need. For example, uCloudlink is operating with a global leading cloud platform to provide better connectivity services for its smart ramping. During the third quarter, we have turned the efforts into upgrading our current portfolio of offering to provide a better learning experience for IoT customers and prepare these products and solutions for more diverse application scenarios. We expect our 2.0 business to grow with the support of our innovative CloudSIM and HyperConn technology as we continue to introduce our solutions services and products to the market, and strengthen our collaborations with local partners. Let's now move to the page 15. uCloudlink positions itself as a pioneer technology solution provider in a data connectivity market. Based on mature 1.0 business, and newer 2.0 business, we promote a long-term development of our PaaS and SaaS ecosystem, which has been recognized by various business partners. We remain confident in our business development team to empower the building of our PaaS and SaaS ecosystem, and in our research and development teams to assess diversified needs to our customers posed to us. We are more than pleased to announce that we maintain a positive operating cash flow for the second consecutive quarter during the third quarter of the year 2022. And we successfully achieved a positive adjust net income, non-GAAP for the first time since the global outbreak of the COVID-19 pandemic in the second quarter of year 2020. Our total revenue reached $18.2 million during the third quarter of the year 2022. And for the first quarter of year 2022 we expect, we would further improve our total revenue to be between $90 million and $22 million representing an increase of 8% to 25% compared to the same period of the year 2021. We expect these improvements will allow us to build a more solid, financial and operational position to see better results in the future. We believe that connected to better connection, uCloudlink is a significant driving force in the transformation of the increasing advanced information era. We are committed to build a more connected future for customers for more customers and users and we strive to make a positive impact in serving the 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 September 30, 2022. Let us turn to page 17. Average daily active terminal for the third quarter were 297,501, of which 1.522 owned by the company and 295,979 owned by our business partner, representing an increase of 16.2% from 256,124 in the third quarter of 2021. uCloudlink 2.0 service accounted for around 65% of the total DAT [ph] during the third quarter of 2022. Average daily data usage per terminal was 1.71 gigabyte in September 2022. Please turn now to page 18 which shows global diversification of our business. We had around 98% of the total revenue from outside Mainland China. During the quarter 2022, Japan contributed to around 35.1% of our total revenue. For other countries revenue, the American market had a largest contribution to our business reflecting the further development our America business and we will continue to expand other markets such as Europe and Southeast Asia, etcetera. During the quarter 2021, we had 3.7% of total revenue coming in from Mainland China 46.6% of the total revenue coming from Japan and 49.7% of total revenue coming from other countries and regions. Please now turn to Page 20. I will go through our financial highlights of the third quarter of 2022. Service-related revenue as a percentage of total revenue was 69.2% during the third quarter of 2022 compared with 34.2% during the third quarter of 2021. Revenue from international data connectivity service and local data connectivity service increased by 30.1% and 38.7% year-over-year, respectively. This increase in revenues from data connectivity service was mainly attributable to the gradual recovery of international travel and the continuous development of our local data connectivity service business. Let's move to Page 21, which shows the revenue breakdown of our two business segments, namely revenue from service and sales products. Our total revenue decreased by 5.7% from $19.3 million in the third quarter of 2021 to $18.2 million in the third quarter of 2022 primarily due to a decrease in sales of certain terminal and data-related products. However, revenue from service was $12.6 million representing an increase of 20.5% from $10.5 million from the same period of 2021. This increase was primarily attributable to the increase in revenue from international data connectivity service and local data connectivity service. Let us turn to Page 22 for gross margins of our business. Our service gross margin increased to 57.9% in the third quarter of 2022 compared to 43.5% in the same period of 2021. And our overall gross margin was 47.7% in the third quarter of 2022, increased from 28.3% during the same period of 2021. The increase of our service gross margins during the third quarter of 2022 was primarily attributable to highest margin profile from international data connectivity service. Let us move to Page 23, which shows the breakdown of our operating expenses. Excluding share-based compensations and others, excluding share-based compensation, operating expenses as a percentage of total revenue was 40% in the third quarter of 2020 compared with 61% during the same period of 2021. We have further streamlined our business operations, including optimizing labor costs. And our total operating expenses, excluding share-based compensation, decreased to $7.3 million in the third quarter of 2022 compared to $11.8 million in the same period of 2021. Let's turn to Page 24. Operating cash flow turned positive for the second consecutive quarter during the third quarter of 2022 and was $1.2 million compared to negative $5.7 million during the same period of 2021. This is primarily a result of our on-going efforts to improve margins profile and control operating expenses. Our cash and cash equivalents and short-term deposits were $12.5 million as at September 30, 2022. Our CapEx was $0.1 million compared to $0.3 million in the same period of 2021. Let us move to Page 25. The net loss during the third quarter of 2022 was $4.6 million compared to $7.0 million during the third quarter of 2021. Adjusted EBITDA was positive $0.9 million during the third quarter of 2022 compared to negative $5.4 million during the third quarter of 2021 successfully achieved a positive adjusted net income non-GAAP and adjusted EBITDA non-GAAP for the first time since the global outbreak of COVID-19 pandemic in the second quarter of 2020. As mentioned above, the company is working toward improving its bottom-line results and financial position. In October, we announced early redemption of a convertible debenture due to our increasing confidence in improved financial positions. We are confident in the company's capability to execute strategies to further enhance our financial and operations position. With that, let me conclude today's presentation. Thank you and we start our Q&A session.

[Operator Instructions] The first question comes from Vivian Zhang with Diamond Equity Research. Please go ahead.

Good morning. Congrats on that quarter. My -- so my first question is that, what's the reason why the company can continue to generate positive operating cash flow for the second consecutive quarter? How will this affect the company?

Yes. Yimeng Shi will be answering the questions. Yes, the second quarter, we maintained the positive operating cash flow following the second quarter of 2022. The main reason that came from the two, First, our margin profile has been improving quarter-over-quarter as we illustrate on our presentations, our service gross margins and overall growth -- overall gross margins is reached the highest levels. So that contributed to our gross profit amount increased significantly. And the second point is our we have maintained control of our operations process. We streamlined our operation -- business operations. And as we demonstrate our operating expenses has been decreased significantly compared to the same periods last year. So that's the two main contribution to our second quarter's positive cash flow. And we expect this trend the positive cash of uCloudlink will be achieved in the fourth quarter of this year. So we believe our financial position has been improving and support our growth in the future.

Yes, by the way our international business recovery. So this is a high-margin business. Also had to get more high-margin business.

Okay, got it. So can you share with us what matters have you taken to control costs and achieve positive adjusted net income and EBITDA?

Yes. The similar reasons as our positive operating cash flow. The gross margin -- overall gross margin improved a lot. And our operating expenses have been decreased at the same time as well. So we combine combinations together, we will achieve a positive adjusted net income and positive adjusted EBITDA. So we expect this improvement will be carried on in the fourth quarter and the next year as well. So the company's current situation will be improving on this basis.

Okay. Can you elaborate on the -- like what specific knowledge you've taken, like to decrease the operating expenses, because we saw that operating expenses decreased a lot, but what matters have you taken?

Yes. This as we -- in the release, we -- the main decrease in amount came from the headcount-related cost. That's the numbers as our headcount has been reduced compared with the same period last year. So we report that the headcount numbers in the presentations is 300 around. So compared with last year's numbered headcount has been -- but our efficiency, our efficiencies operations have been improved, and this number of headcounts to support or to achieve the year-end outlook and also achieve our growth in the next year as well.

Okay. Got it. So my last question is that compared with the Japanese and Chinese markets, the proportion of revenue from North America has increased a lot this year. So can you share with us the growth of the North American market? And how -- what are the drivers for the growth there?

Yes. So I’m Chen speaking. So North America is -- you can see data. Our North American market increased quite a lot from last year about several million to this year, we forecast more than $10 million. That's a big increase. There are several reasons; one is U.S. recoveries from COVID-19. So the requirement for the international traveler become more and more popular, that's one reason. And the second reason is the U.S. market the coverage of network is not as good as in China and Asia. So people need a better coverage and best traffic jams in local network. So that's increased, especially for 5G, the coverage improved. So we launched the world's first 5G solution, the [indiscernible] solution in United States, that's popular in this market. And the third the local market, including IoT and including the local requirement for the better coverage. So it's getting more and more, I think, more and more industry and people need better coverage to providing a better service. So these are three key reasons that because our product can provide the best coverage compared to other products. So we win more and more market share in this market.

Okay. Got it. So can you share with us like who are the main competitors of you in the North American market?

Yes, there are -- in different areas, we have different competitors. There are some competitors like Sky Long, they are similar technology. But we can provide much wider product line and much better quality because we come from the telecom industry, and we understand the quality is -- how important to the market. So we invest a lot in our products. That's why we are currently the only one vendor who can provide a global 5G long solution, which is no other product can provide, the case. The other case is we -- our product is the best seller in the for the Cloud SIM technology in the Amazon market, you can see our market share there. And also our customers understand our quality product patent is in a leading position in this market. This help us quickly exploring the U.S. market and the market share increased very quickly.

Okay, I see. Thank you. That’s all my questions.

[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. Thanks everyone for joining us. If you have any questions, please contact uCloudlink's Investor Relations through the contact information provided on our website, or contact our Investor Relations firm on the Equity Group. Thank you, everyone.

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

Thank you.