uCloudlink Group - Q1 2023

Transcript

Operator (participant)

Good day, welcome to the uCloudlink Q1 2023 Earnings Conference Call. All participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jillian Zeng, investor relations for uCloudlink. Please go ahead.

Jillian Zeng (Investor Relations Contact)

Thanks, everyone, for joining us on our Q1 2023 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com and via newsletter service. I will give a brief introduction to our uCloudlink management team. Mr. Zhiping Peng is our Co-Founder and Chairman of the Board of Directors. Mr. Chaohui Chen is our Co-Founder, Director, and Chief Executive Officer. Mr. Yimeng Shi is our Chief Financial Officer. Mr. Chaohui Chen, our Co-Founder and CEO, will begin with an overview of the company's recent business highlights, which will cover the earnings presentation posted on our IR website. Mr. Yimeng Shi, our CFO, will then discuss the company's operational highlights and financial results. Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on management team'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, 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 the 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.

Chaohui Chen (Co-Founder, Director, and CEO)

Thank you, Jillian, good morning, everyone. Thank you for joining us on our Q1 of 2023 earnings call today. We appreciate everyone's time. We are pleased to start off 2023 with strong Q1 results, which is the first time that we achieved both positive net income and positive cash flow generated from operations with growth in revenue since the outbreak of the COVID-19 pandemic. The average daily active terminals continue to be in an upward trend and reach a historic high of over 300,000 in this quarter as we continue to expand our global PaaS and SaaS ecosystem, reflecting the accelerated market demand for uCloudlink's services across the global market.

uCloudlink 1.0 is our international data connectivity services business, which tends to be a higher margin line of business and has historically been one of our key growth drivers. During the Q1 of 2023, uCloudlink 1.0 business revenues increased 38.5% year-over-year to $7.8 million. We are delighted that our uCloudlink 1.0 business demonstrate significant growth as a result of accelerated international travel recovery across our major markets, particularly in Japan. We also have observed increased demand from our 1.0 RoamingMan business in Mainland China and Southeast Asia, which are historically strong markets with wide coverage of RoamingMan brand.

Average daily active terminals for uCloudlink 1.0 business increased by 55.3% compared with the same period of 2022, which indicates the significant growth of our business. We remain optimistic in our ability to further grow our uCloudlink 1.0 business, thereby solidifying our leading global position in the international data roaming solutions market. We look forward to serving our users globally as the market continues to pick up. uCloudlink 2.0 is our local data connectivity services business, which focuses on local residents and solve challenges among the carrier. This business line took off during the pandemic as we seized the opportunities in the local markets by offering reliable local data connection services.

Over the past two years, we continue to strengthen our presence in local markets, including Japan and North America, where we help operator and business partner improve their data connectivity services and resolve data connection problems through our PaaS and SaaS platform based on our patent technologies, including Cloud SIM and HyperConn technology solutions. Our uCloudlink 2.0 business reported $2.2 million in revenues, up by 37% in the Q1 of 2023, as compared to $1.6 million in the same period of 2022. We received recognition from business partners in established markets like Japan and North America, and continue our efforts in expanding our PaaS and SaaS platform ecosystem.

We expect our high-quality, reliable data connectivity services based on our innovative HyperConn technology will receive more industry recognitions and applications, especially in the mobile and fixed broadband industry. We expect to launch more innovative HyperConn products catering to the needs of a diverse set of mobile virtual operator and virtual mobile operators, business partners, and individual customers in the near future. On the Internet of Things, IoT side of our business, we have shared updates on multi-application scenario support by our IoT module, including Wi-Fi router, IP cameras, et cetera, which have been welcomed by our customers in various markets for their competitive advantages. In Japan, we are actively working with our business partners to explore and expand application scenarios for the IoT business to further improve the data connectivity experience for their customers.

At the same time, our team continues to leverage existing resources in the research and development to develop uCloudlink 3.0 business. The one-stop mobile data traffic sharing marketplace application is planned to launch the first version in the near future, which leverages our efforts in building scalable users based through our uCloudlink 1.0 and 2.0 models. This marketplace enable end users devices to connect to available network anytime, anywhere, utilizing the GlocalMe app new version. We remain confident in the market conditions ahead for the remainder of year 2023, and we're prepared to take advantage of the peak season of international travel during the summer.

We believe our track record of delivering reliable and high-quality data connectivity experience and our history of introducing innovative products and solutions enable us to maintain a leading position in the international data connectivity services industry. We are always committed to continuous development of innovative solutions and plan to expand our Cloud SIM and HyperConn technology solutions to more application scenarios. Our business aims to deliver value-add services to our customers by continuously improving their mobile data connectivity experience. We'll continue to execute our growth strategies with our expanding portfolio of offerings. I will now turn the call over to our CFO, Mr. Yimeng Shi.

Yimeng Shi (CFO)

Thank you, Mr. Chen. Hello, everyone. I will go over our operational and financial highlights for the Q1 of 2023. Average Daily Active Terminal, DAT, is an important operating metric for uCloudlink as it measures the trend of customer usage over the period, reflecting our ongoing business performance. In the Q1 of 2023, average daily active terminal were 304,121, of which 3,483 owned by the company and 300,638 owned by our business partner, up by 11% from 273,870 in the Q1 of 2022.

The average DAT for our uCloudlink 1.0 and uCloudlink 2.0 business accounted for around 42.7% and 57.3% of the total DATs respectively during the Q1 of 2023. Average daily data usage per terminal was 1.62 GB in March 2023. Total revenue for the Q1 of 2023 were $18 million, representing an increase of 15.3% from $15.6 million in the same period for 2022. Revenue from service in the Q1 of 2023 were $12.9 million, an increase of 31.4% from $9.8 million in the same period of 2022.

Revenue from service as a percentage of total revenue was 71.7% during the Q1 of 2023, up from 62.9% during the same period of 2022. During the Q1 of 2023, Japan contributed 43.1%, North America contributed 33.6%, Mainland China contributed 5.1%, and other country and regions contributed the remaining 18.2% of the total revenue, compared to 40.2%, 37.9%, 1.9%, and 18% respectively in the Q1 of 2022. Overall gross margins improved to 47.8% in the Q1 of 2023, as compared to 37.4% in the same period of 2022.

Our gross margins on service increased to 60.5% in the Q1 of 2023, from 49% in the same period of 2022. Excluding basics compensations, our total operating expenses decreased to $6.9 million, or 38% of total revenues in the Q1 of 2023, as compared to $9.3 million or 60% of total revenue in the same period of 2022. We realized net income of $2.1 million in the Q1 of 2023, which represent a significant improvement on our bottom line results as compared to a net loss of $7.9 million in the same period, 2022.

Similarly, adjusted EBITDA improved to $2.1 million during the Q1 of 2023, as compared to effective $3.9 million in the same period of 2022. We're pleased as this is the first time we achieved positive net income since the outbreak of COVID-19 pandemic. Adjusted EBITDA has remained positive for three consecutive quarters. We have achieved positive operating cash flow, $1.6 million during the Q1 of 2023, which compared to effective $4.4 million during the same period of 2022. We have significantly improved our bottom line in the Q1 of 2023 and have generated positive cash flow from operation for four consecutive quarters. Our strengths and financial position enable us to execute our growth strategies. With that operators, let's open it for Q&A.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Theodore O'Neill (CEO)

Thank you very much. Can you hear me okay?

Yimeng Shi (CFO)

Yes.

Theodore O'Neill (CEO)

Yes. Good. Congratulations on the good quarter. I have three questions for you. The first on gross profit. I can see that the overall margin was better in the quarter because you had a greater mix of services. I wanted to understand, the margins got better on both products and services. Is that due to pricing or was there some efficiencies in the products?

Yimeng Shi (CFO)

We answer your questions one by one. You just raised the first question, right? Yeah, regarding the gross profit, you will see that we improve gross profit gross margins in the past couple quarters. That's a massive improvements on quarter-over-quarter basis. For the service gross margins is improving depending on this mix of the service categories. That a mixture of the three categories of main service revenues. One is the international roaming connectivity service, one is a local connectivity service, and the PaaS and SaaS service.

The improving gross margins will reflect the proportions of the revenue generating from international roaming service and from power source is growing faster than the locals connectivity service. That's where we get this the improving result of the gross margins improving over the past couple quarters. We look forward in the near future this years, because the border has been opened up and is for most countries, so the people can move in cross border more freely than before. We expect there's more revenue and were generated from the international roaming connectivity service. If it zoom in the proportions of international roaming service will be improving in the futures.

We expect the overall service gross margin will be improving a bit, or at least, keep stable in following quarters or this year. That's my opinion.

Theodore O'Neill (CEO)

Thank you. My next question is about the research and development expense. It says that in the prepared remarks that you had a decrease of $0.2 million in testing and certification expenses. Can you give me some insight into how that number for testing and certification? I would have thought it would sort of go up and down with new products. Can you give us a little more sense of how that goes up or down quarter-to-quarter?

Yimeng Shi (CFO)

I answer you the first half part regarding the decreases R&D expenses. Our CEO may give some colors on the new product. We report the streamlines our operations since the year 2021. That's reflecting our overall head count is decreasing as compare with the year 2022. The number head count has been cut off for some certain part for improving our operational efficiency. That's where the reflecting the on comparables basis. Our overalls expenses, expenditures have been decreases from year to year basis. That's a similar stories for this R&D functions as well.

We invest a lot in the past couple years. We invest a huge investments on research and development functions. That support our every year, we launch a different new product, a new features, and upgrade our platform as well. But we will still invest or leverage our R&D's to support, to develop a new product. Regarding the new product developments, our CEO gives more color on that.

Chaohui Chen (Co-Founder, Director, and CEO)

I'm Chaohui Cheng. I add some comment because, you know, several two years ago, we heavily invest in R&D side. You can see we are our loss last two years ago, the heavy lost, that's because we heavy invest in R&D side. Here, the, you know, 5G, here the HyperConn, we finish all the, you know, development. We end of last year, we start to control the cost and control R&D investment. This did not impact our, you know, a new product launch in these years. I in my presentation, I already tell some, you know, the choose. We will launch in near future for our HyperConn product.

This will meet for mobile broadband and fixed broadband. This is a huge opportunity for for the mobile broadband operator market. I think in the next quarter, we are prepared to launch this around this time, we will launch this new product in the Q2 and off the quarter. We continue has this HyperConn product launch to enhance high quality, reliable quality because no matter fixed broadband or mobile broadband operator, their network will face the failure. Once the failure happen, we can help them to, you know, improve the experience. That's a quite unique solution. We expand this HyperConn connection product to expand to the different scenario for carrier and for the cable carrier, fixed broadband carrier, and mobile broadband carrier.

We launch some new product for uCloudlink 1.0 business to enhance the, you know, to be the more convenient, more compact, and the 5G product leading transition and both these two direction. We will launch more new product to meet uCloudlink 1.0 fast growth market as well. For IoT. We will launch an IoT product to improve the. We apply the HyperConn, this technology into IoT product, because we know the autopilot, you know, like a robot, you know, like this IoT technology scenario also need a very high reliable connection. In this high reliable connection, we do a lot of the, you know, breakthrough. We hope in the coming quarter, we can give this good news to everyone, you know.

Basically, once the our and the growth of recovery from the pandemic. I think our R&D will also keep very stable investment and also our new product, new solution, because of historic investment. That after this year, we will keep also strengthen our R&D investment. I believe we will get a more good result and a bright future for our HyperConn Cloud SIM.

Theodore O'Neill (CEO)

Okay. Thank you. My last question is about accounts receivable. You've done a remarkable job at keeping receivables low relative to revenue. Is that primarily because the services are prepaid?

Chaohui Chen (Co-Founder, Director, and CEO)

Yeah. I think it's just the improvements on the balance, the account receivable, depends on the couple of factors. We, the first one is we pay more attention and effort on improving our business term on, as you say, the mentions the prepay term and the credit term, the short-term credit term and some, we have some more, some bigger orders from this good credit customer as well. That's the first I think first contributors for the improvements, AR balance. The second part, I think that we pay effort to collect the cash from some agents account receivables.

Some customers suffer this pandemic one year ago, two years ago. Now they recover gradually in terms of making profit or something, generate more cash flow from the business activities. We have our efforts on cash collections have good achieve a positive result that help reducing this, improving the balance of the account receivables. The third part is, depends, that we're selling more to individual customers via e-commerce, via some our website. This e-commerce generate just a, that's a cash, a prepay cash at all, and before they use our service. This all the various contributors help our improvements, AR managements.

We will also take this management in the future. We'll maintain well our cash positions. I expect our operating cash flow will be keep this positive trend in the following couple of years. I think we will, I believe we will achieve a better than last year's. That we expect. Yeah. Yeah. By the way, you know, because our customer situation, the financial situation also is much, much better compared to the, you know, during the pandemic. They are all willing to accept our more, you know, better, you know, payment condition.

Theodore O'Neill (CEO)

Thank you very much. That concludes my questions.

Operator (participant)

Again, if you have a question, please press star then one. The next question comes from Vivian Zhang with Diamond Equity Research. Please go ahead.

Vivian Zhang (Equity Research Analyst)

Hello, this is Vivian Zhang with Diamond Equity. Congrats on the great quarter. Most of my questions have been answered, but I still have one left, which is regarding your new business, the mobile data traffic sharing marketplace application. Can you give us a specific update on this business and when do you expect it to be launched and generate meaningful revenue? Thank you.

Chaohui Chen (Co-Founder, Director, and CEO)

Okay. Yeah. Because, you know, currently we are only majorly, I think it's not only majorly, we're selling both local and both local international data. And this data is high quality and reliable cross-carrier network. That's currently our business majorly come from. I know this industry, we have people, they may, they may be not willing to carry the extra MiFi. We have a global eSIM that also is like a eSIM, software SIM. There are many kinds of sub-technology. Even their connection quality may are not as good as our Cloud SIM, but they have some advantage as well. For example, more convenient, no need, you know, you install a MiFi.

We could now waiting for our Cloud SIM GMI GlocalMe Inside embedded to the handset. Even these years, our GlocalMe Inside still on the progress, but we already developed our sharing marketplace, this concept. We will launch a marketplace. This marketplace can contain several technology inside, not only including the physical SIM, Cloud SIM, eSIM, and also the software SIM as well. We can provide all kinds of the data connectivity and the different, you know, advantage, and the convenient, and the co-price, and high quality, different, you know, competitive requirement, data connectivity quality, and convenient, you know, scenario product to meet the different user's requirement.

For example, if like iPhone, now you can use our MiFi solution to provide a better connection for family use, multiple people use, a better quality network. Also you can embed our software SIM or our, you know, eSIM solution. We can provide more users, and we educate some people understand, let the customer understand, oh, they are one stop can providing all kinds of technology. These all kind of technology, at least one or two can meet your requirement. We can... At least, marketplace can help us. First we will show, demonstrate in our brand, under our brand, we will copy this technology and this brand, this scenario to all our business partner.

This become a marketplace, and this will help us enlarge our user base because we are currently only 20% or 30% people know us. Another 70% or 80% haven't used our technology. With new launch of this version of the marketplace, we will cover all the technology, all the requirement of the users. This help us and help our partner to meet all the requirement of the user application. Help us acquire a huge base of the user base. That's our first version of when we launch in near term for this marketplace app, GlocalMe app first, we'll copy this one to all our partner. That's our initial plan.

Vivian Zhang (Equity Research Analyst)

Okay, that makes sense. Thank you.

Operator (participant)

The next question comes from Safan Li with China Great Wall Securities. Please go ahead.

Safan Li (Analyst)

Hi. I'm Safan Li from China Great Wall Securities. Can you hear me?

Chaohui Chen (Co-Founder, Director, and CEO)

Yes.

Safan Li (Analyst)

Okay, I have a small question about SaaS and PaaS sector, because like from the report of our Q1, the revenue of PaaS and SaaS did not like grow much from the year-on-year or quarter-to-quarter. What's the plan and also the outlook for the whole year on this sector? I feel this is also the main focus of our company. I want to know about what's our plan for the PaaS in the, like, the client expand or the technology development in this sector. Yeah. Thank you.

Yimeng Shi (CFO)

Okay. Thank you. I first answer these questions. Then maybe our CEO will give some more supplementary. Yeah, for the Q1, there's, yeah, it seems the PaaS/SaaS revenue is still growing compared with last year's. A small percentage growth by 3.7% growth compared with the same period of last year's. Underlying, underlying this figure, our daily actives terminal has achieved historical highest over 300,000. You will see our revenue, service revenue generated from 1.0 and 2.0 increase massively compared to last year's.

For example, the international roaming service gross over 38.5% over the last year's. uCloudlink 2.0 gross 37% over the last year's. In our business models, PaaS/SaaS play a central platform to build up a global ecosystem to support our global business partner to provide a better high quality connectivity service.

Either to roaming, international roaming or to a local residence. This give us more flexible business model with our partners. Our partner have options either to pay a PaaS SaaS service to us, and they supply their data from their own resource. They can choose buy a data package from uCloudlink, and then we provide the SaaS function to support their provider service to their customers. We will treat this overall service package in the one pools to view our growth trend. In the futures, we give this option flexibility to our business partners. For this, in the futures, we expect we disclose our guidance as well.

The guidance give us a growth is a trends around 20 something to the guidance $85 million-$100 million of revenues. In this guidance, I think the overall growth will give us a message, PaaS SaaS and in a $1.2 billion business will be growing as well in this guidance.

Chaohui Chen (Co-Founder, Director, and CEO)

Yeah. Okay. I have add more comment. Because, you know, initially, you know, recovery from the international travel from the COVID-19 is step-by-step. At this stage, our partner, they are prefer to use our data than immediately increase their PaaS SaaS capacity. That's the reason I answer why our traffic data traffic increased a lot. Platform no increase such, you know, significantly. That's because of the reason I mentioned first. Personally, I believe that once the, you know, the Q2 or third quarter, the recovery from the China, Japan, all these Southeast Asia countries for international roaming business become stable and recovery more, more apparently and more significantly.

I think some part of our data will transfer to be a PaaS SaaS, you know, increase. That's the reason. Personally, I believe the, for the PaaS SaaS, for one point of business, following the quarter, we keep continue increase. That's the fourth part. Second part, I just mentioned, because currently, you know, our new solution, we will launch this new solution for mobile broadband, fixed broadband, for hyperConn series new product in the Q2 and third quarter. This will bring a lot of the PaaS SaaS, you know, revenue for us as well in the following quarter. Also for IoT. I think IoT, we have some, a lot of the bigger customer now on the way.

If this customer we acquire, I think the PaaS SaaS will be increased as well. Finally, I mentioned, you know, for marketplace, our the first new version will be launching in near-term. Also, once we copy this new model to our partner, also we bring, you know, the PaaS SaaS increase. I think, especially for HyperConn for the, you know, mobile broadband and fixed broadband carrier, this carrier majorly is a operator. They are preferred, you know, our PaaS SaaS solution.

Follow this solution, you know, for the HyperConn for, you know, for fixed, solution, once adopt, by more and more carrier, I believe the PaaS SaaS in our revenue will increase a lot. That's the, you know, general information.

Safan Li (Analyst)

Okay. That's very clearly. That makes sense. Thank you.

Operator (participant)

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

Jillian Zeng (Investor Relations Contact)

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, The Equity Group. Look forward to speaking to you again on our next quarterly call. Thank you.

Chaohui Chen (Co-Founder, Director, and CEO)

Thank you.

Yimeng Shi (CFO)

Thank you. Thank you, everyone.

Operator (participant)

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

Yimeng Shi (CFO)

Thank you. Bye-bye.