uCloudlink Group Inc. (UCL) Q3 2023 Earnings Report, Transcript and Summary

Hello, and welcome to the uCloudlink Third Quarter 2023 Earnings Conference Call. All participants will be in 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. Please go ahead.

Hello, everyone, and thank you for joining us on uCloudlink’s third quarter 2023 earnings call. The earnings release and our earnings presentation, are now available on our IR website at ir.ucloudlink.com. Joining me on today’s call are Mr. Zhiping Peng, our Co-Founder and Chairman of Board of Directors. Mr. Chaohui Chen, our Co-Founder, Director and Chief Executive Officer, and Mr. Yimeng Shi, our Chief Financial Officer. Mr. Chen will begin with an overview of our recent business highlights. Mr. Shi will then discuss our financial and operational highlights for the third quarter of 2023. They will all be available to take your questions in the Q&A session that follows. 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 are based on management's current expectations and automations 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 company’s 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, due to events, trends 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 Mr. Chen. Please go ahead.

Thank you, Jillian, and good morning, everyone. Thank you for joining us today. We appreciate everyone taking time. We delivered Another strong set of results during the quarter, highlighted by a 31% year-on-year increase in total revenues to $20.9 million, and sixth consecutive quarter of positive cashflow from operations. Average daily active terminals, our key operational metric, increased once again to a new all-time high of over 320,000. This was a well round performance across our entire business. During the quarter, we continued to consolidate and develop our new uCloudlink 1.0. International Data Connectivity Services, driving an excellent performance in this segment. Total revenues from uCloudlink 1.0 International Business increased 42.7% year-on-year to $11.4 million. The recovery of the international travel is creating significant tailwinds for this business, with growth from Japan and mainland China as a significant growth drivers during the quarter. While Chinese outbound travel remains soft, Chinese international travelers during the peak summer holiday season, increasingly chose to use our Roaming Man brand services, and are accounting for a growing share of our International Data Connectivity Services. Because of that, revenues from mainland China increased to 7.2% of our total revenues during the quarter, as compared to 2.4% during the same period last year. This strong performance was enabled by the continuous development of our technology products and services offerings and the value-add services. During the quarter, we consolidated our leading position as a 5G roaming solution provider as cross border travelers continue to discover our 5G portable Wi-Fi terminals, 5G terminal packages, and parallel user experience they are providing. One of our most popular mobile Wi-Fi devices is now equipped with an artificial intelligence services assistance, especially provided for Chinese cross border travelers, means that our product are not just data traffic connectivity terminals, but also intelligent travel assistants. We launched a GlocalMe SIM card, which currently offers coverage across 10 high demand travel destination and a GPS tracker-enabled portable Wi-Fi terminal. This, we believe, is currently a small list of its kind in the world. In addition, we piloted an eSIM solution in October year 2023, which will enable us to certify a wider range of data connectivity needs from our customer side. Taken together, we believe our high margin uCloudlink 1.0 business will remain a key driver of our business as long-term recovery of international travel continues. We are confident that our expending and upgrading portfolio of products and services will help us and our business partners achieve further market share gains and enhance our leadership in the international data roaming business. We are working on expanding from data connection to more daily life application scenario by enriching our portfolio offerings. Our internet of things, IoT solutions, are a key part of these strategies. And during the quarter, third party devices utilizing uCloudlink’s CloudSIM technology powered by IoT solution, went to the market in Japan. Besides embedding our IoT module in third party devices, we also expect to cooperate with major IoT module manufacturers on integrated CloudSIM technology. We also continue to conduct commercial testing of our highest performance 5G customer premise equipment CPE, which we expect to launch in the near future. The upgraded CPE provides home and office internet connection let perfect seamless between the fixed and mobile networks, make it a reliable substitute for traditional fixed broadband offerings. We believe this new offering will bolster uCloudlink’s positions in the fast-growing market for home and office internet connectivity, helping us expand our user base and gain the additional market share in the fixed broadband market. In addition, we launched retail sales of our GPS-enabled portable Wi-Fi terminal in Hong Kong during this quarter, which marks the beginning of our new efforts to provide more daily life services. We believe these GPS-enabled devices will become an indispensable assistance in consumers’ daily lives, offering an easy way to keep track of personal belongings, monitor the location of family members, including elderly relatives, kids, and pet. As I mentioned before, our offerings CloudSIM products, the GlocalMe SIM card, and an eSIM solution, and we plan to launch various hyperconnectivity solutions compatible with CloudSIM, soft SIM, and eSIM technology in the future. To sum up, we believe our new offerings open up a new range of application scenarios for our solutions and hold significant long-term growth potential. Many of these solutions are designed to generate not just revenue from sales product and the data connectivity services, but also PaaS and SaaS revenue that recur on a monthly, quarterly, and annual basis. Our team is working diligently to expand our offering to serve a broader customer base and a wider variety of use cases. We also believe that we are well positioned to create a mobile data (tertiary) marketplace that will define the mobile data connectivity experience. All of our efforts are geared towards enforcing the competitive advantages that will facilitate the development of this marketplace, our growing user base, our extensive relationship with global mobile network operators, and our innovative technologies. We will continue building out our offerings and working toward our objective of enabling everyone to enjoy a more intelligent and convenient life through reliable and high-quality data connections. For the fourth quarter of year 2023, uCloudlink expects total revenues to be between $22 million and $26.2 million, representing an increase of 12.2% to 33.7% increase, compared to the same period area of year 2022. I will now turn the call over to Mr. Shi.

Thank you, Mr. Chen. Hello, everyone. I will now walk you through our operational and financial highlights for the third quarter of 2023. Average daily active terminal, DAT, measures customer usage trends and reflects the overall performance of our business. In the third quarter of 2023, average daily active terminals were 325,078, up by 9.3% from the same period of last year, and composed of approximately 12,000 owned by the company, and 313,000 owned by our business partners. The uCloudlink 1.0 and uCloudlink 2.0 business accounted for around 50.4% and 49.6% of total CAT, respectively, during third quarter of 2023. Average daily data usage per terminal was 1.56 gigabytes in September 2023. Total revenues for the third quarter of 2023 were $23.9 million, representing an increase of 31% from $18.2 million in the same period of 2022. Revenue for service were $16.6 million, an increase of 31.9% from $12.6 million in the same period of 2022. Revenue from service as percentage of total revenue was 69.7%, up from 69.2% during same period of 2022. During the third quarter of 2023, as a percentage of total revenue, Japan contributed 44.2%. North America contributed 26.3%. Mainland China contributed 17.2%, and other countries and regions contributed the remaining 12.3%, as compared to 35.1%, 41.5%, 2.4%, and 21%, respectively, in the same period of 2022. Revenue from mainland China increased significantly, primarily driven by Chinese travelers using Roaming Man brand service as a key increasingly resumed outbound international travel. Overall gross margin was 51.2% in the third quarter of 2023 as compared to 47.7% in the same period of 2022. Gross margin on service was 35.9% in the third quarter of 2023 as compared to 37.9% in the same period of 2022. Excluding share-based compensations, total operating expensive were 8.7% million, or 36% of total revenue in the third quarter of 2023 as compared to $7.3 million or 40% of total revenue in the same period of 2022. We recorded net income of $3.5 million in the third quarter of 2023, as compared to a net loss of $4.6 million in the third quarter of 2022. Adjusted EBITDA non-GAAP improved to $4.1 million during the third quarter of 2023, as compared to $0.9 million in the same period of 2022. We achieved positive operating cashflow of $2.8 million during the third quarter 2023, as compared to $1.2 million during the same period of 2022. We successfully achieved positive cashflow from operation for a sixth consecutive quarters, accumulating operating cashflow inflow of $16.7 million through the previous six quarters. In summary, our financial performance continued to improve during the third quarter, and we believe that we are well positioned to execute on our strategic growth initiatives. With that, Operator, please open up for Q&A.

The first question comes from Vivian Zang from Diamond Equity Research. Please go ahead.

Hello, this is Vivian Zang with Diamond Equity Research. Congrats on the strong quarter. Here are my questions. First, could you elaborate on what drove the margin expansion in the quarter, particularly margin on products sold? Was it a price increase or product mix? And is this expansion sustainable? Thanks.

Thanks, Vivian. I answer your first question regarding the improvements on gross margins. As you see, the overall service margin improved a lot compared to the same period last year. The major contributions came from the sales of products, the mix of sale products. So, there's improving on the sales products that contribute overall for all this quarter’s gross margins. For service gross margin, there is a similar labor, a little bit fluctuation compared with the same period last year. So, looking forward, we can expect the recovery in international travel to resume in the following year. So, we - and International Connectivity Service gross margin is one of our highest gross margins in our categories. So, we expect this service gross margin will keep this to similar high level in the fourth quarter of this year. And for sales products, it depends on the mix of product selling to the customers. That's within this sales products, gross margins will be carryon depends on the mix product selling. Thank you.

Okay. Got it. Thank you. My second question will be about the new launched products. Can you share with us more information about the portable Wi-Fi terminal and how you expect this new product to drive the company's growth?

Yes. So, first, I think is we launched 5G this year, 5G product this year in the last quarter, so in Q2. So, quite successfully, and this is what’s leading a faster award 5G global roaming free roaming high performance Wi-Fi. And this help us achieve quite a good market share because currently this almost only one portable Wi-Fi available in this market for global roaming. And that's first. And second, we launched a smallest, like a business card size portable Wi-Fi. This portable Wi-Fi can enhance our market position in the international business because we can combine our big Wi-Fi and smaller Wi-Fi together, provide more flexibility to meet the various need of the family package. For example, the family, several family members, they can use one package for big device, or you can independently use the smaller device. So, that means get more choices and give uses more flexibility. That's the second product we launched in third quarter. Another product, for example, we provide artificial intelligence into our Wi-Fi. That means for Chinese travelers, they are hard to use, like ChatGPT in China is difficult and because you need a foreign number to register, et cetera. This barrier is there. With our solution, we’re working with this service provider to provide artificial AI into our Wi-Fi, and then our user travel from China to outside - to the world, they can use the ChatGPT. So, really, so I think that can enhance our service ability. By the way, so we also provide a SIM card business because I know that many people, there are no - even the portable Wi-Fi can provide the best connection, but some users still want to use a simple solution, not willing to carry an extra device. For this scenario, we provide the SIM card business for them, and our SIM card business can download the different countries portfolio, and also is combined with our CloudSIM enable these devices only with a SIM same card, they can free roaming in more than 10 countries. I believe in the following quarter, we will be providing more countries, and this will meet more customer need for more convenience for people who are not willing to bring extra devices. So, I think all - by the way, also our solution now can integrate more services in the future like in our (indiscernible) in integrate more like artificial, like (power calling) and this kind of services can help the Chinese and foreigners more easily more convenience during their travels. So, all this is a product for our 1.0 business. And also, we launched 4G and 5G CPE. 4G already won an award the first high reliable CPE. This can help the fixed network become more reliable, no matter the fixed net network how reliable, there are some period in the years yearly, there's some broken, some job. You can use the multi mobile network to enhance, to guarantee, provide the most strong backup or disaster recovery for fixed network. That's our quite unique solution for fixed mobile broadband. And this also help us to consolidate always the better connection brand and the services. And the final one, we also launched our CloudSIM into the IoT service, like in Japan announced, and also the more and more module understand our value for the close carrier and also the global roaming free. And this can provide all of this smart device integration and locally get the best reliable connection. That's basically for smart intelligent device. This market share also solutions get more and more attraction for the end users. So, all these fine new products and solutions, I believe not only can enlarge our market share in 1.0 business, you can see we already win the market share compared with before COVID-19, our market share for ME5 rental business in China is higher than year 2019. So, even in China, the recovery of the international business is soft. It's not so as quicker as we expect, around 30% of recovery so far, but we still get achieved a big market share and a good result. Thank you. That’s my answer.

Okay, that makes sense. Thank you so much for the detailed information. That's all my question. That's all.

The next question will come from Theodore O'Neill of Litchfield Hills Research. Please go ahead.

Thank you very much, and congratulations on a strong quarter. My first question is about the growth rate of terminals versus data. So, the terminal growth rate was strong at 9.3% in the quarter, but the total data consumed was less than 1%. Should those two things be related? Does it have any meaning that one’s much larger than the other?

Hi. Thanks, Theo, for questions. Let me first explain a bit for this, the two metrics. Yes, you mentioned the metrics is daily active terminal, right? The data act terminal, we achieved a new highest of over 220,000. Compared with last year, this figure has increased by about 9.3%. It seems not very significant growth, but the revenue generation is quite strong compared with this growth rate in terms of daily active terminal. That means, yes, daily activity is a very important operation metrics. We give our hints how whether our user, our partner use how much of the terminal to generate revenue. So, that's - the revenue generation is quite rely on the usage of our terminals to provide a better connections. So, that's a strong indications of how revenues generation and growth in the future. So, that figures pay us in the future. In this lever, 320,000, that's the daily active terminal support our generated revenue in very fast growth pace. So, we - that's why we are developing more new products to satisfy customers requirements. So, what more products are describing by our CEO, Mr. Chen. So, this new product will be long to the market and will support our more active terminal in the market. So, our growth will be growth - our revenue - service revenue will growth as well when we - the daily active terminal grows.

Okay. I understand. The next question is about the IoT, okay? So, in your prepared remarks, you're talking about the expanding number of third party devices powered by IoT solutions in Japan during the quarter. Is there any particular end use application for those IoT, or is it broad-based?

Yes. Well, our IoT, I think for Japan case is achieved by a partner. It is, they apply this solution for the end user, in the end user. So, for the (loader), try to enhance the reliable of the network connectivity potentially is big. So, that's the fourth phase launch, and we believe they will launch the more bigger scale in the future. And for the IoT in Japan case, and also I just mentioned, we embed our solution into the module manufacturer. That means our CloudSIM technology embed into the module manufacturer achieve progress. And I think as more and more module providers embed our GlocalMe inside, so I believe this smart module know that it was SIM card placed inside and we provide a better connection, more network connection and the worldwide connection for this smart device. And that is become more and more a strong need, I understand for this smart device, for example, like the smart card, like this smart charger, power battery, smart power battery, they are worldwide - shipped to the worldwide, but they need to be monitored. They are this factor and their performance. So, I think we provide this best connection and also a very competitive connection. And that's why I believe in this part and in the next year and the following years, we will achieve a big number of the connections.

And my last question is about cash balance. You were building a good size cash balance here. I wonder if you have plans for acquisitions or dividend or similar?

Yes. You see, as we launch, we achieved positive cashflow from operations for a sixth consecutive quarter. And so, accumulating operating cash inflow $16.7 million through the previous six quarters. So, our cash balance now is over $20 million. So, that’s - yes, we achieved in terms of growth rate is quite good. We expect we'll keep this trend to generate more cashflow from operations to further improve our financial positions. Let our - we want to have enough cash balance to support the company to grow and expand in the future. Now, so far, we don't have the target to announce to do some acquisition, this kind of things. We still have to focus our performance to generate more cashflows to enhance our strength position. That's my answer to your question.

Thank you very much.

Yes, I think, yes, I think - I believe - so I think our business 1.0 and also the following new product launch, I believe we will generate more revenue of our cash. That's a good business. So, and we are - first is try to make the company more stronger, more healthy, first step. And the second also, we consider any potential opportunity in the future. So, which are in the consideration, but I think the first step is make the company more stronger, more healthy. That's our preferred thinking.

Okay. Thank you very much. That completes 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.

Well, 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. Our contacts, our investor relations firm, Christensen Advisory. We look forward to speaking to you all again on our next quarterly call. Thank you.

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