uCloudlink Group Inc. (UCL) Q3 2024 Earnings Report, Transcript and Summary

Hello, and welcome to the uCloudLink Group Inc. Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Daniel Gao, Investor Relations of uCloudLink. Please go ahead.

Hello, everyone, and thank you for joining uCloudLink's earnings call for the third quarter of 2024. The earnings release and our earnings presentation are now available on our Investor Relations website at ir.ucloudlink.com. Joining me on today's call are Mr. Qing Pong, Co-founder and Chairman of the Board of Directors, Mr. Chaohui Chen, Co-founder, Director, and Chief Executive Officer. Mr. Chen will begin with an overview of our recent business highlights.

Thank you, Daniel, and good morning or evening, everyone. We continue to gain growth momentum during the quarter with revenue increasing 5.6% year-over-year to $25.2 million, in line with our expectations. Our financial position remains solid with net income reaching $3.4 million and a positive net cash inflow from operations of $2.0 million. During the quarter, we actively enhanced our market presence. Our GoCloudMe ecosystem continues to thrive, offering comprehensive data connection solutions and diverse business lines, including local me live and programming IoT, that are driving our expansion beyond the travel sector into various aspects of daily life. Supported by the further consolidation of our leading position in the long-run market, our telecom e-mobile fixed broadband business line continues to grow.

Our 1.0 international data connectivity services continue to grow, with full-speed 5G network coverage increasing from 75 countries and regions from 15 in the second quarter of 2024. Driven by the recovery of international travel and the increasing demand across key markets, we further consolidate our leading position in the long-term market and expand our market share in Mainland China and Japan. This growth highlights the strong preference of Chinese travelers for our service during the peak summer travel season, reflecting an expanding segment of our international data connectivity services. Our next-generation portable Wi-Fi product integrates with HyperCard solution and will be launched in the near future. According to the Mobile Economy 2024 report from the Global System for Mobile Communication Association (GSMA), the global number of 5G connections is expected to rise to 5.5 billion by 2030 from 1.6 billion at the end of 2023.

Second, our GoCloudMe line of GoTo mainline solutions, which include KeyTracker, Unicorn, and LongPart, made significant progress during the quarter. We launched an extensive market campaign and actively developed new distribution channels to support building what we believe will be a promising new revenue stream going forward. Following the introduction of our GoCloudMe line product series at the Weeva Technology in May, the series' commercial launch in July 2024 further enhanced our market exposure by attending other leading global expos such as Travel Meet Asia and the IFA Berlin 2024. Additionally, we made breakthroughs in developing retail channels, signing with one of America's largest airport retail channels to make Unicorn, LongPart, and KeyTracker among other products available at airports across the US.

We will develop strategic partnerships with other key channel partners across the US and Europe in the coming quarters. With other solutions already in development, we are looking forward to launching more new products in the coming quarters.

Third, within our local me business, we continue to expand the market presence of the over-the-air (OTA) as more users resubscribe to our data plan service, paving the way for our innovative AllSeam solution. This solution, which consolidates OTA SIM, eSIM, and our pioneer cloud SIM technology, is under commercial testing and expected to commercially launch in the near future. Our AllSeam solution is uniquely positioned to surpass cross-carrier restrictions, empower various smartphones, and set a new industry benchmark for mobile connectivity and convenience.

Lastly, our GoCloudMe IoT business line continues to advance, with several products embedded with our technology already in small-scale commercial applications, demonstrating the strength and capabilities of our solutions to a broader audience in the IoT experience industry. Leveraging our software cloud SIM technology compatible with various IoT device chipsets, we are exploring additional application scenarios as we engage with several leading manufacturers in the security IP camera, dashboard panel, and related sectors. We believe that better connectivity empowers better life. We will continue to leverage GoCloudMe Live, GoCloudMe SIM, and their integrated innovative core HyperCard and cloud SIM solutions to expand our global presence through business partners and channels globally.

Over the past ten years, the local me mobile broadband business has accumulated millions of users, leveraging daily active terminal data in the third quarter of over 320,000. We expect the global online business to accumulate a broader user base of over ten million. Furthermore, both the GoCloudMe SIM and GoCloudMe IoT business have the potential to bring us a user base of over one hundred million in the future, allowing us to transition from a provider of mobile data traffic solutions to an integrated and comprehensive marketplace. With each of these business lines settling into this whole marketplace, we expect our user base to diversify beyond the travel sector and grow substantially going forward. We are confident that we have the right strategy in place to generate sustainable growth in the coming quarters. For the fourth quarter of 2024, we expect total revenue to be between $25 million and $30 million, representing an increase of 15.2% to 38.2% compared to the same period of 2023.

I will now turn the call over to Mr. Shi for the financial results.

Thank you, Mr. Chen, and hello, everyone. I will go over our operational and financial highlights for the third quarter of 2024. Average daily active terminal is an important operating metric for us as it measures customer usage trends over experience, which is reflective of our performance. Average daily active terminal (DAT) in the third quarter was 320,452, of which 55.4% were from uCloudLink 1.0 International Data Connectivity Service, and 44.6% were from uCloudLink 2.0 Local Data Connectivity Service. Average daily data usage per terminal was 1.52 gigabytes as of September 2024. As of September 30, 2024, the company had served 2,759 business partners in 61 countries and regions. The company had 183 patents with 158 approved and 25 pending approval, while the pool of SIM cards was from 389 MNOs globally as of September 30, 2024.

Total revenue was $25.2 million, representing an increase of 5.6% from $23.9 million in the third quarter of 2023. Revenue from services was $17.3 million, representing an increase of 3.9% from $16.6 million in the same period of 2023. Revenue from services as a percentage of total revenue was 68.6% during the third quarter of 2024, remaining relatively stable when compared to 69.7% during the same period of last year. Geographically speaking, during the third quarter of 2024, Japan contributed 46.6%, Mainland China contributed 27.8%, Latin America contributed 12.8%, and other countries and regions contributed the remaining 12.8%, compared to 44.2%, 17.2%, 26.3%, and 12.3% respectively in the same period of 2023.

Overall gross profit was $12.19 million compared to $12.21 million in the same period of 2023. Overall gross margins were 48.4% in the third quarter of 2024, compared to 51.2% in the same period of 2023. Gross margins on services increased to 57% in the third quarter of 2024 from 55.9% in the same period of 2023. Gross margins on products decreased to 23.1% in the third quarter of 2024, from 40.1% in the same period of 2023. Excluding share-based compensation, total operating expenses were $9.7 million, or 39% of total revenue, in the third quarter of 2024, compared to $8.7 million, or 36% of total revenue, in the same period of 2023. Net income was $3.4 million compared to $3.5 million in the same period of 2023. Adjusted EBITDA was $4.4 million in the third quarter of 2024, compared to $4.1 million for the same period in 2023. For the third quarter of 2024, we generated an operating cash inflow of $2 million compared to $2.8 million in the same period of 2023. For the third quarter of 2024, capital expenditures were RMB 1.1 million compared to $0.8 million in the same period of 2023. We maintained a solid balance sheet with cash and cash equivalents increasing to $27.7 million as of September 30, 2024, from $26.8 million as of June 30, 2024.

With that, operator, let's open it up for Q&A.

We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press the star key followed by the number two. The first question comes from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Thank you, and congratulations on the results in the quarter. I just have a couple of questions. My first question is about the AllSeam solution and your expectation that it will launch commercially in the near future. Can you give us an idea of what sort of milestones you have to meet in order to get to the commercial launch stage?

Yes, about AllSeam, first, at the beginning of this year, we already gained experience from the SIM card business. We have already sold nearly 300,000 OTA SIM cards, so we now understand how to play in this industry. Our AllSeam solution, also known as Yisim Trio, is its official name, and we plan to launch it at the end of the fourth quarter. That is the first milestone. We will launch the product, which we believe is currently the best second SIM card for people who have an original SIM card. We are the best SIM card choice because we overcome the first SIM card's limitations for roaming and domestic data connectivity, addressing coverage issues. We also overcome the primary SIM card's flexibility limitations regarding data packages. Our fully software-based AllSeam solution adapts to all handsets, not just new-style handsets that support eSIM. That is our advantage. We call our AllSeam compatible with OTA SIM and physical SIM, making it a unique solution in this industry. We hope next year we will get more promotion and market understanding. We can work with partners worldwide, including local carriers and mobile virtual network operators. We plan to attend MWC to announce this news about our new solution.

Okay, and in regards to your guidance into Q4, your sequential revenue from Q3 to Q4 historically has been lower in some quarters. Your guidance here at the high end of the range suggests that Q4 will come in much better than sequentially, with higher growth than you have had in the past. What gives you confidence that you could come in near the higher end of the range for Q4?

Yes, you are correct in noting that our guidance for the fourth quarter this year is between $25 million and $30 million. In past years, the fourth quarter revenue was normally lower than the third quarter revenue, which was the pattern for our legacy revenue stream from portable Wi-Fi. However, this year, the fourth quarter guidance is higher than the third quarter revenue. We believe our new products, like GoCloudMe Live, have been launched to the market and are gaining some revenue in the fourth quarter as well. This trend of growth with more than just portable Wi-Fi terminals will be significant in the coming years. This shows our strategy to grow from one business line to four business lines, and that is where our confidence comes from for this fourth quarter and the following quarters next year.

Okay, that makes sense. Understood. My last question is about the sales and marketing expenses in the quarter. I understand there were some expenses for trade shows and product launches. Can you talk about whether or not you expect the expenses in Q3 sales and marketing to continue at that level, or will that come down somewhat going forward?

We will invest more in marketing in different countries like the US, Japan, and Europe. As we disclosed, we have partnered with one of the biggest airport retail channels, and we will continue to enhance our marketing exposure for our new products like GoCloudMe Live and the AllSeam solutions. These solutions are innovative in the market, so we need to invest more in marketing to raise awareness of our products and their value. We will invest more in marketing expenditures, but at the same time, we will balance our financial positions to support and invest in growth. Marketing expenditures may increase, but we will maintain growth, profit, and operating cash flow.

Thank you. That completes my questions.

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

Hello, good morning and evening. This is Vivian Zhang with Diamond Equity Research, and congratulations on another strong quarter. My first question is about the partnership you just mentioned with the US airport retail channel. Can you provide us with more color on this cooperation and how it will impact future product sales?

Yes, in the second quarter, we announced at the Weeva exhibition that we would launch the GoCloudMe Live product. We launched three new products in July, and after a quarter of effort, by the end of Q3, we signed a contract with one of the largest US airport retail channel partners. You can already see our products in 30 US airports in shops. In airport shops, you can find our products like Unicorn, LongPart, and KeyTracker. These products were launched in mid-November. We signed the contract at the end of Q3, and the products were in shops by mid-November. I can also provide some guidance for Q4. We have already signed another contract with a major American channel, making it two big channels in the US airport sector. The second one will have a different contract in Q4, and we will release the product in the next Q1. That is the progress for our efforts in the US airport channel. In the following quarters, we will continue our efforts with other major US channels to be accepted by channel buyers. We also have some breakthroughs in Q4 in Europe with some big channels, successfully signing contracts. That is the progress we have made in just three to six months. We hope next year we can break through more top-tier channels with consumer or test channels in the next few years.

Okay, got it. My next question is about the PaaS and SaaS services revenues, which increased significantly, over 29%, in the third quarter. Is this growth sustainable?

Yes, we cooperate with our global business partners in various ways. Our PaaS and SaaS revenues have different models. Some businesses are willing to pay more platform fees for future set operations efficiencies and improvements. You can choose different packages for our platform services.

Okay, that makes sense. That is all my questions. Thank you.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Daniel Gao for any closing remarks.

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 at Ascent Investor Relations. We look forward to speaking to you all again on our next quarterly call. Thank you.

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