Ucloudlink Group Inc

NASDAQ:UCL

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to the uCloudlink Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would like now to turn the conference over to Jillian Zeng. Please go ahead.

[Jillian Zeng, executive]

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 Cofounder 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 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 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, change in market conditions or otherwise, except as required by law. Please also note that uCloudlink's earnings press release and today's conference call includes discussions of unaudited GAAP financial information and an unaudited non-GAAP financial measures. uCloudlink's press release contained reconciliation of the unaudited non-GAAP measures to the most directly comparable unaudited GAAP measures.

I will now turn the call over to Mr. Chen. Please go ahead.

[Chaohui Chen, executive]

Thank you, Jillian, and good morning, everyone. Thank you for joining us today. We appreciate everyone taking time. We've delivered another strong set of results during the quarter, highlighted by 31% year-on-year increase in total revenues to USD 20.9 million and 6 consecutive quarter of positive cash flow 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-run] performance across our entire business.

During the quarter, we continued to consolidate and develop our 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 USD 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 choose to use our Roamingman 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 product and services offerings and 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 unparalleled user experience they provide.

One of our most popular mobile Wi-Fi devices is now equipped with an artificial intelligence services assistance especially provides for Chinese cross-border travelers means that our products are not just data traffic connectivity terminals, but also intelligent travel assistance. We launched the GlocalMe SIM card, which currently offers coverage across 10 high-demand travel destinations and our GPS tracker-enabled portable Wi-Fi terminal that we believe is currently a smallest of its kind in the world.

In addition, we pilot and eSIM solution in October year 2023, which will enable us to satisfy 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 a long-term recovery of international travel continues. We are confident that our expanded and upgraded 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 this strategy. And during the quarter, third party devices utilizing uCloudlink's cloud SIM technology powered by IoT Solution went to the market in Japan. Besides embedding our IoT module in the third-party devices, we also expect to cooperate with major IoT module manufacturers on integrated cloud SIM technology.

We also continue to conduct commercial testing of our high performance 5G Customer Premise Equipment, CPE, which we expect to launch in the near future. The upgraded CPE provides home and office Internet connection led seamlessly between the fixed and mobile networks, make it a reliable substitute for traditional fixed broadband offerings.

We believe this new offering will bolster uCloudlink positions in the fast-growing market for home and office internet connectivity helping us expand our user base and gained additional market share in the fixed broadband market. In addition, we launched retail sales of our GPS-enabled portable Wi-Fi terminals in HongKong during this quarter which marks the beginning of our new efforts to provide more daily life services. We believe this GPS-enabled devices will become indispensable assistance in consumer daily lives, offering an easy way to keep the track of personal belongings, monitor the location of family members including elderly, relative, kids and pets.

As I mentioned before, our offering include cloud SIM products like GlocalME SIM card car and an easing solution, and we plan to launch various hyperconnectivity solutions compatible with cloud SIM, soft SIM and eSIM technology in the future.

To sum up, we believe our new offerings open up a new range of application scenario for our solutions and holds significant long-term growth potential. Many of these solutions are designed to generate not just revenue from sales product and data connectivity services but also PaaS and SaaS revenue that recur on our 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 mobile data traffic sharing marketplace that will define the mobile data connectivity experience. All of our efforts are geared towards reinforcing 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 2003, uCloudlink expects total revenues to be between USD 22 million and USD 26.2 million. representing an increase of 12.2% to 33.7% increase compared to the same period of year 2022.

I will now turn the call over to Mr. Shi?

[Yimeng Shi, executive]

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 terminal was 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 DAT, respectively during the third quarter of 2023. Average daily data usage per terminal was 1.56 gigabytes in September 2023.

Total revenue for the third quarter of 2023 were USD 23.9 million, representing an increase of 31% from USD 18.2 million in the same period of 2022.

Revenue per service were USD 16.6 million, an increase of 31.9% in from USD 12.6 million in the same period of 2022. Revenue from service as a percentage of total revenue was 69.7%, up from 69.2% during the same period of 2022. During the third quarter of 2023 as a percentage of our 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 Roamingman brand service as a key increasingly resume outbound international travel.

Overall gross margin was 51.2% in the third quarter of 2023 as compared to 47.7% in same period of 2022.

Gross margins on service was 55.9% in the third quarter of 2023, as compared to 57.9% in the same period of 2022.

Excluding share-based compensations, total operating expenses were USD 8.7 million or 36% of total revenue in the third quarter of 2023 as compared to USD 7.3 million or 40% of total revenue in the same period of 2022.

We record net income of USD 3.5 million in the third quarter of 2023 as compared to a little loss of USD 4.6 million in the third quarter of 2022. Adjusted EBITDA non-GAAP improved to USD 4.01 million during the third quarter of 2023 as compared to USD 0.9 million in the same period of 2022. We achieved positive cash operating cash flow of USD 2.8 million during the third quarter of '23 as compared to USD 1.2 million during the same period of 2022.

We successfully achieved positive cash flow from operation for 6 consecutive quarters, accumulating operating cash inflow of USD 16.7 million through the previous 6 quarters. In sum, 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, this open up for Q&A.

[Operator]

[Operator Instructions] The first question comes from Vivian Zhang from Diamond Equity Research.

[Wei Zhang, analyst]

Hello. This is Vivian Zhang with Diamond Equity Research. Congrats on a 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 change sustainable?

[Yimeng Shi, executive]

I'll 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 the products -- the mix of sale product. So that's improving on the sales products that contribute overall for this quarter's gross margins.

For service gross margins, this is at similar level, a little bit fluctuations compared with the same period last year. So looking forward, as we can expect the recovery international travel resumes in the following years. So in national connected service, gross margin is one of our highest gross margins in our categories. So we expect that service gross margins will keep this to similar high level in the fourth quarter of this year. And for sales products depends on the mix of product selling to the customer. That's within the sales products gross margin will be the carry-on depends on the mix product savings.

[Wei Zhang, analyst]

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

[Chaohui Chen, executive]

So first, I think the launched 5G product this year in the last quarter. So in Q2, so quite successfully. This is the world leading first 5G global roaming, free roaming, high-performance Wi-Fi. This help us achieve quite good market share because currently, this is almost only 1 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 to provide more flexibility to meet the varied needs of the family package, for example, the family -- several family member, they can use 1 package for a big device or you can independently use the smaller device. So that means get more accesses and give uses more flexibility, that's second product we launched in the third quarter.

Another product, for example, we provide artificial intelligence into our Wi-Fi. That means if you're a Chinese traveler, they are hard to use ChatGPT, like ChatGPT in China is difficult and because we need foreign number to register, et cetera. This barrier is there. With our solution, we're working with the service providers to provide artificial AI into our ME5 and then our user, traveler from China to outside to the world, they can use the ChatGPT so freely. So I think that's going to enhance our service ability.

By the way, so we also provide a more SIM card business because many people they know that 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 a SIM card business for them and our SIM card business can download different countries portfolio and also combined with our cloud SIM enable these devices. Only with the SIM card, they can free roaming in more than 10 countries.

I believe in the following quarter, we will be providing more countries. At least, we'll meet more customer need for more convenience for people who are not willing to bring extra device. So I think all -- by the way also our solution now can integrate more services in the future like in our [ G4 ] integrate more like artificial, like cloud calling and these kind of services can help Chinese and foreigners more easily, more convenience during their travel.

So all this is a product for our 1.0 business. And also we launched 4G and 5G CPE, 4G already launched in the world, the first high reliable CPE. This can help the fixed network become more reliable. No matter the fixed network how reliable, there are some areas in the [indiscernible] you can use the [indiscernible] 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 services.

And the final one, we also launched our Cloud of Things into the IoT service in Japan announced and also more and more module and understand our value for the cross carrier and also the global roaming free, and this can provide all of the smart device international and locally get the best reliable connection that's basically for small intelligent device.

This market share of solutions get more and more attraction for the end users. So all these 5 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 the China, the recovery of the international business is soft. It's not so as quick as we expect around 30% of recovery so far, but we still get achieved a big market share and a good result.

[Operator]

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

[Theodore O'Neill, analyst]

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 2 things be related? Does it have any meaning that one is much larger than the other?

[Yimeng Shi, executive]

Let me first explain a bit for the 2 metrics. Yes, you mentioned the metric is a daily active terminal, right? The daily active, we achieved a new highs of over 320,000. Compared with last year, this figure is increased by about 9.3%. It seems not very significant growth, but our revenue generation is quite strong compared with this growth rate in terms of daily active terminal.

That means, daily active is a very important operational 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 better connections. So that's the strong indications of how revenues generation and growth in the future. So that figures tell us in the future.

In this level, 320,000 that's the daily active terminal support or generate revenue in a very fast growth pace. So that's why we develop more new product to satisfy customers' requirements. So more products as described by our CEO, Mr. Chen. So this new product will be launched to the market and will support our more active terminal in the market. So our growth will be -- service revenue will grow as well when daily active terminal grow.

[Theodore O'Neill, analyst]

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?

[Chaohui Chen, executive]

Yes. Our IoT I think for Japan case is achieved by a partner. It's -- they apply this solution for the end user. So call later try to enhance the reliable of the network connectivity. Potentially, it's big. So that's the fourth phase launch. We believe that we are launching more bigger scale in the future.

And that's for the IoT in Japan case and also, I just mentioned, we embed our solution into the module manufacturer that means our cloud SIM Technology in the module manufacturers achieve progress and I think as more and more module provider, embed our GlocalMe insight. So I believe that this smart module now that is to a SIM card play inside and will provide better connection, more network connection and worldwide connection for this smart device and that it's become more and more a strong need, I understand for this smart device.

For example, like smart car, like this smart charger, power battery, smart power battery, they are shipped to the worldwide, but they need to be monitored, their risk factor and their performance. So I think we provide the best connection and also very competitive connection. And that's why I believe in this part and in the next year and in the following years, we will achieve a big number of the connections.

[Theodore O'Neill, analyst]

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

[Yimeng Shi, executive]

Yes, you see as we launch, we achieved positive cash flow from operations for 6 consecutive quarters. So accumulating operating cash inflow of $16.7 million through the previous 6 quarter. So our cash balance now is over USD 20 million.

So that's -- yes, we achieved in terms of growth rates is quite good. We expect we'll keep this trend to generate more cash flow from operations to further improve financial positions. We want to have enough cash balance to support the company to grow and expand in the future that we -- so far, we don't have the target to allow us to do some acquisitions this kind of things. We still focus our performance to generate more cash flow to enhance our strong position. That's my answer to your question.

[Chaohui Chen, executive]

Yes. I think yes, but I think our business 1.0 and 2.0 and also the 4 new product launch, I believe we will generate more revenue of our cash. That's a good business. So -- we are first is try to make the country more stronger, more healthy first step. And the second offer, we consider any potential opportunity in the future. So we're just in a consideration. But I think the fourth step is make the company more stronger, more healthy. That's our preferred thinking.

[Operator]

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

[Jillian Zeng, executive]

Well, thank you once again for joining us today. If you have further questions, please feel free to contact uCloudlink Investor Relations through the contact information provided on our website or contact our Investor Relations firm, Christensen Advisory. We look forward to speaking to you all again on our next quarterly call. Thank you.

[Operator]

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