uCloudlink Group Inc. (UCL) Q4 2023 Earnings Report, Transcript and Summary

Good day, and welcome to the uCloudlink Group Inc. Fourth Quarter and Full Year 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 fourth quarter and full year 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 fourth quarter and full year 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 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, 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. We appreciate everyone taking time out of your busy day. We are very pleased to report another strong set of results in year 2023, highlighted by 19.8% increase in full year revenues to US$85.6 million. 2023 was a milestone in the turnaround of our business following the COVID-19 pandemic. With operating cash inflow of US$6.5 million and net income of US$2.8 million. Our 1.0 international data connectivity services business continued to recover in year 2023. In our major markets, China and Japan, we are seeing the early signs of a recovery in outbound tourism and business travel following the COVID-19 pandemic. With more Chinese tourists begin to use our Roamingman brand services again and the recovery in Japan gaining momentum. Our market share in these major markets is growing, which will create significant growth opportunities for us going forward. With one of the most extensive 5G roaming networks in the world that cover 55 countries and regions, our competitive local full-speed 5G roaming solutions not only offer extensive coverage, but also significantly enhance the user experience, which further expands our user space and cements our leading positions in the roaming market. While working to turn around our business over the past years, we leveraged our existing research and development resources and cutting-edge technologies to explore business opportunities beyond portable Wi-Fi terminals and build and expand the array of comprehensive data connectivity solutions to satisfy a wide range of users' needs. In addition to significantly enhancing the travel experience by catering to the diverse data connectivity needs of various users, we will also offer more intelligent and convenient live applications like item tracking, pattern management, and emerging communication. Among others, through our GlocalMe Life solutions business, we believe that these solutions will expand our market reach and help us establish a broader market presence. Our 'Better Connection Empowers Better Life' mission is leading us to extend our business beyond the travel sector to various aspects of daily life, thereby generating long-term sustainable growth. To drive this transformation, we plan to reorganize ourselves into four distinct product lines in the year 2024. GlocalMe mobile/fixed broadband, second, GlocalMe SIM, third, Internet of Things (IoT), and the final GlocalMe Life solutions. We believe this business reorganization will allow us to operate in a more agile fashion, take advantage of emerging opportunities, and enable us to engage with a broader user base with a robust slate of new products and solutions coming in the future. So please allow me to tell you more about what’s happening and what’s to come at UCLOUDLINK. Let me go into a little more detail on the new array of product lines we have planned for the future. First, we will continue to strengthen the foundation of our business, GlocalMe mobile/fixed broadband, with an expanded offering of innovative cloud SIM technology, hyper-connectivity solutions and additional value-added services that improve the user experience. We believe that we are uniquely positioned to expand our share in the roaming market. In addition, we plan to introduce a commercial-grade dual broadband Customer Premises Equipment (CPE), which supports local fixed networks as well as multiple mobile networks from all major operators. It will be able to maintain connectivity even when fiber-optic lines fail or are disrupted. Our 5G CPE will be large-scale and commercial, which will unlock additional opportunities in the mobile/fixed broadband space. Second, GlocalMe SIM solutions, including our over-the-air (OTA) SIM and eSIM solutions, will evolve into our innovative “All SIM” solution which will allow us to engage with a broader end user base beyond those in the portable Wi-Fi terminals market. Our pioneering “All SIM” solution is poised to breakout of cross-carrier restrictions and empower every smartphone. Third, our GlocalMe Life solutions business has an exciting slate of product announcements planned in the future, which will bring seamless connectivity into various high-frequency daily life application scenarios, as I mentioned earlier, such as pet management, item tracking as well as emergency communication. Last but not least, we will also integrate these cloud SIM technology and hyper-connectivity solutions into our IoT business. Leveraging both proprietary and third-party smart modules compatible with mainstream chipset platforms, our IoT business will empower terminals and third-party devices, allowing them to intelligently select and dynamically switch between multiple local carriers worldwide. This diverse array of solutions, we believe, will help expand our business beyond portable Wi-Fi terminals and drive growth in the future. Because of the changes we’re making, our customers will enjoy a more intelligent and convenient life through our high-quality data connections for a range of everyday scenarios. Finally, I would like to review our guidance for the first quarter and full year 2024. We are optimistic about our future growth prospects following this business reorganization. However, we also recognize that we are only just beginning this transformative journey and these initiatives will take time to mature. For the first quarter of 2024, we expect total revenues to be between US$17.5 million and US$18.5 million, representing a decrease of 2.8% to an increase of 2.8% compared to the same period of 2023. For year 2024, we expect total revenues to be between US$95 million and US$112 million, representing an increase of 11% to 30% from that of year 2023. I will now turn the call over to Mr. Shi.

Thank you, Mr. Chen. Hello everyone, I will go over our operational and financial highlights for the fourth quarter and full year of 2023. Average daily active terminals is an important operating metric for us as it measures customer usage trends over each period, which is reflective of our business performance. In the fourth quarter of 2023, average daily active terminals were 316,207 of which 10,075 owned by the Company and 306,132 owned by our business partners, representing an increase of 6.2% from 297,884 in the fourth quarter of 2022. During the fourth quarter of 2023, 47% of daily active terminals were from uCloudlink 2.0 local data connectivity services and 53% of daily active terminals were from uCloudlink 1.0 international data connectivity services. Average daily data usage per terminal was 1.55 gigabytes in December 2023. Total revenues for the fourth quarter of 2023 were US$21.7 million, representing an increase of 10.8% from US$19.6 million in the same period of 2022. Revenue from services was US$14.9 million, representing an increase of 19.1% from US$12.5 million in the same period of 2022. Revenue from services as a percentage of total revenues was 68.7% during the fourth quarter of 2023, up from 63.9% during the same period of 2022. During the fourth quarter of 2023, as a percentage of our total revenues, Japan contributed 43.1%, North America contributed 24.3%, mainland China contributed 16.5%, and other countries and regions contributed the remaining 16.1%, compared to 43.7%, 33.9%, 3.0% and 19.4%, respectively, for the same period for 2022. Overall gross margin improved to 52% in the fourth quarter of 2023 from 51.3% for the same period of 2022, while gross margin on services increased to 60.1% in the fourth quarter from 59.4% for the same period of 2022. Excluding share-based compensation, total operating expenses increased to US$11.6 million, or 53% of total revenues, in the fourth quarter of 2023, compared to US$10.4 million, or 53% of total revenues, in the same period in 2022. Net loss was US$1.8 million in the fourth quarter of 2023, compared to a net loss of US$1.1 million in the same period of 2022. Adjusted EBITDA was US$1.5 million in the fourth quarter of 2023, compared to US$1.6 million for the same period of 2022. Moving to 2023 full-year financial results. Total revenues for 2023 rose to US$85.6 million from US$71.4 million in 2022, driven primarily by an increase in revenues from data connectivity services. Revenues from data connectivity services were US$46.7 million, an increase of 31.7% from US$35.5 million in 2022. Within data connectivity services, revenues from international data connectivity services rose to US$37.9 million from US$28.1 million in 2022, as the recovery in international travel accelerated. Overall gross margin improved to 49% in 2023 from 45.5% in 2022, and our gross margin on services increasing to 58.5% from 56%. The increase in gross margin on services in 2023 was primarily attributable to a more favorable business mix with a larger proportion of revenues coming from international data connectivity services, which tend to have higher margins. For the full year 2023, excluding share-based compensation, total operating expenses increased to US$34.6 million, or 40% of total revenues in 2023, compared to US$34.4 million, or 48% of total revenues in 2022. We achieved a net income of US$2.8 million in 2023, improving from a net loss of US$19.9 million in 2022. Adjusted EBITDA was US$9.8 million in 2023, compared to a loss of US$2.3 million in 2022, according to the same measurement. For the full year 2023, our capital expenditures were US$2.1 million, compared to US$0.4 million in 2022. For the full year 2023, we achieved positive operating cash flow of US$6.5 million, up from US$4.4 million in 2022. Moving on to balance sheet items, our cash and cash equivalents increased to US$23.4 million as of December 31, 2023, compared to US$20.3 million as of September 30, 2023. We are pleased to have strengthened the Company’s financial position over the course of the year and are well positioned to continue growing our business. With that, operator, let’s open it up for Q&A.

[Operator Instructions] The first question today comes from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Thank you very much. I have two questions this morning. My first question is about revenues from data connectivity services of US$11.8 million in the quarter. That is down from US$13.8 million in the third quarter. I was wondering if you could give us some insight into that, and if it was driven by any particular geographic region that was down sequentially more so than others.

Hi, Theo. Thanks for your question regarding this data connectivity service for that quarterless change. Yes, you mentioned that two quarters, the third quarters compared with the fourth quarters. Yes, as you know in our disclosures, the international roaming service is a main difference for our growth in service. The seasonal reasons, the third quarter is peak time, is a summer vacation. So that's a peak time for the roaming service. And in the fourth, similarly, it's a little bit down for this roaming service. That's a part, a pattern of the seasonal change.

Is it across all geographies, or is it any particular geography?

No, that's overall seasonal change. The fourth quarter of the year is only a short period, like Christmas holidays. But in the third quarter, it's a long summer vacation. So that's the overall seasonal change, not particularly to some particular regions.

Okay, understood. Thank you very much. My other question is about G&A expenses of US$6 million in the quarter. I noticed also last year the G&A expenses rise sequentially from third quarter to the fourth quarter. And this year, the same thing. It went from US$3.8 million in the third quarter to US$6 million in the fourth quarter. And I was wondering what drives that change sequentially from 3Q to 4Q in G&A?

Yes, from our understanding, that's a good incentive plan for our employees. We have, as we disclosed, we performance turnaround positions in terms of the revenues growth and also a net income tend to be positive compared with the huge loss in the year 2022. So the management decided to pay a significant increase for annual bonus for the whole company employees. So that's specifically driven by a pay rise in terms of annual bonus. So I think that's a very good motivation to our employees. And we have a tight control on the headcount numbers in the course of years of growth. And this year, the whole company's employees have well motivated to support our growth for this year.

Thank you very much. That explains it to me. Thank you very much.

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

Hello. This is Vivian Zang with Diamond Equity. My first question would also be about the fourth quarter revenue, which didn't meet your guidance of US$22 million to US$26 million. So we'd like to know the reason for not meeting these expectations for the first quarter.

Hi, this is Yimeng. I answer the questions first, and then Mr. Chen will add some color on this fourth quarter's revenue. A little bit low then is guidance. We just got the guidance is US$22 million at the bottom. Yes, just a small, we achieved US$21.7 million in the fourth quarter of 2023. Just a little bit low then our guidance. That's still on this, our business patents. We just have some hardware orders. We defer some hardware orders to the later periods because we have some commercial terms is agreed by the customers before we deliver this hardware to customers. So that our business, if we're taking into consideration this hardware's deliveries in the normal course, we will meet this guidance. Yes. So that's technically is a change in the final week of the month of December.

Yes. By the way, we have another reason to cost less than our expectation. That's because our new product a little bit delayed just for our R&D reason. So that's another reason that caused a little bit less than our expectation.

Okay. I understand. So the next question is that, can you share more information about your newly announced GlocalMe Life solutions business? Because Yimeng, like you mentioned, any products or services can be launched or expected to boost the revenue this year in 2024.

Yes. So in the traditional, before year 2023, we are majorly rely on our portable Wi-Fi to create the major revenue. And from the last year, the third quarter, we start to launch our new product such as OTA SIM card, such as our GlocalMe Life product. So for the smaller business, early business trial. So this year we will officially launch our GlocalMe Life product. That means we create people who need better connection. Because better connection, what is better, we can create revenue from the data. Another expectation, another aspect, we can create a better life for people. For example, if we get the best network, when the old people, they're falling down, they can, their SOS message can send to the rescue center. The old man normally is easy to falling down in the bathroom and the kitchen. Most of these two area, the signal is very poor. Our product can provide not only the local Wi-Fi connection, home Wi-Fi connection, but also cross carrier, all the signal. Then can help send out this critical SOS message and then can enable these old people get the help, get saved. And another thing in our product I mentioned is about a tracker. Our tracker can find something that a normal tracker and the LTEG [ph] could not find. Because with the GPS scenario, our tracker can send GPS location data via the marketing network. Because in a rural area, in the corner of the building, normally coverage is very poor. So marketing network, of course, can help this message send out than just single carrier network. That's why we call our new generation tracker with the better connection can find out something that the traditional tracker and the LTEG could not find. That's one reason. Another second reason is about without GPS scenario, our multi-carrier tracking location capability while carrier base station. We have multi-carrier base station. Normally one carrier, three base station, you can location your product, your items. But with multi-carrier, we can provide maybe 20 base station so we can get a more high accuracy location data. And also we have marketing network can send out this location data. And that's why our tracker can help users find out more possibility for these items. And final one, our product has radar technology for the last 100 meter. It's extremely difficult for people who find out the items in the last 100 meters. But with our solution, you can rely on this 100 active radar to find out where is the device. That's why we call we are the new generation creation tracker, super tracker, which can find the other tracker and LTEG could not find. A similar concept is about the healthy emerging communication I just mentioned before. So this scenario one by one, we will launch the product in the second quarter. And the fourth quarter is for pilot. And second quarter for volume business, for volume launch. So I think in the following quarter, we believe this new product will create or generate more revenue for us. As you understand, we have all the solution including OTA SIM and E-SIM. These also will generate more easy selling than our traditional portable Wi-Fi, can access more customers for travel worldwide. So I believe all these new products will create in the following quarter, more customer base and more revenue base for our business. Thank you.

Okay, I got it. Thank you. Thank you so much. That's all my questions.

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 or speak to our investor relations firm, Christensen Advisory. We look forward to speaking to you all again on our next quarterly call. Thank you. Thank you. Bye-bye.

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