uCloudlink Group - Q1 2024

Transcript

Operator (participant)

Good day and welcome to the uCloudlink First Quarter 2024 Earnings Conference call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone telephone. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Liam Xie. Please go ahead.

Liam Xie (Head of Investor Relations)

Hello everyone, and thank you for joining us on uCloudlink's First Quarter 2024 Earnings call. The earnings release and our earnings presentation are now available on our IR website, ir.ucloudlink.com. Joining me on today's call are: Mr. Zhiping Peng, Co-founder and Chairman of Board of Directors; Mr. Chaohui Chen, Co-founder, Director, and Chief Executive Officer; and Mr. Yimeng Shi, 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 quarter. 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 Securities 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, changes 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 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 most directly comparable unaudited GAAP measures. I will now turn the call over to Mr. Chen. Please go ahead.

Chaohui Chen (CEO)

Thank you, Liam. Good morning or evening, everyone. We had a promising start to the year with total revenues of $18.1 million, in line with guidance. With our business now healthy and back on a growth trajectory, and we maintain the profitability we regained last year, achieving a net income of $0.4 million and generating a net operating cash inflow of $1.9 million in the first quarter of year 2024. Revenue growth was primarily driven by the continuous recovery of our IoT international data connectivity services business, and in particular, our Roamingman services, which continue to respond strongly. With coverage expanding from 55 to 60 countries and regions, our full-speed 5G roaming network solution further solidified our leading position in this sector and has expanded our market share.

According to the Mobile Economy 2024 report from the Global System for Mobile Communications Association or the GSMA, the global number of 5G connections is expected to rise to 5.5 billion by 2027, from 1.6 billion at the end of the year 2023. We also make significant progress in rolling out and expanding a range of comprehensive data connectivity solutions during the quarter to explore opportunities beyond portable Wi-Fi terminals. Let me start with the progress we have made in our GlocalMe Mobile and Fixed Broadband Business line. At the Mobile World Congress earlier this year in Barcelona, we showcased the GuardFlex Pro, our highly reliable dual-broadband consumer premises equipment or CPE solution, which we believe will redefine the industry benchmark for high-reliable connectivity and innovation.

Unlike other CPE solutions on the market, the GuardFlex Pro supports multiple mobile networks from all available major operators in addition to standard local fixed networks. This means it is able to intelligently select and automatically switch networks to maintain the connectivity even when the fiber optic lines fail or are disrupted. Fueled by the surge in remote work on online learning streaming platforms in recent years, the demand for ubiquitous and reliable wireless connectivity is poised for substantial growth. Second, our GlocalMe Life business makes significant progress during the quarter with the initial rollout of new products that bring seamless connectivity into various high-frequency daily life application scenarios, such as package management, item checking, as well as emergency communication.

We soft-launched our first GlocalMe Life product, a smart tracker powered by our innovation solutions that offer far more accurate and reliable tracking, something that the other similar tech or tracker products on the market are unable to. In addition, the smart tracker offers free local emergency internet access to users for security help. Unlike the other similar products on the market, which only support a single network or technology such as Bluetooth to track items, our tracker is able to intelligently select and automatically switch between multiple networks and six different location technologies. Additionally, GlocalMe Life has an exciting slate of Easy Life Series products under development, which would enhance the daily life of smart device users, making them much easier and more convenient. We will unveil three GlocalMe Life products and upgrade the GlocalMe App on May 23rd at the Viva Technology 2024 in Paris.

Meaningful revenue generation from the smart tracker and Easy Life Series products is anticipated to begin in the third quarter, and recurring revenues from subscription and services are anticipated going forward. By offering more intelligent, convenient daily life products that satisfy a wide range of user needs, we are expanding our market research and establishing a broader market presence to diversify our revenue streams and generate long-term sustainable growth. By extending our business beyond the travel sector into various aspects of daily life and commercial life, customers will enjoy a more intelligent and convenient life through our high-quality data connections for a range of everyday scenarios. Third, our newly launched GlocalMe SIM made a solid progress during the quarter, ranking highly on a number of e-commerce platforms for travelers heading to destinations such as Japan and Hong Kong.

Our GlocalMe SIM solutions, including our over-the-air OTA SIM and eSIM solutions, will continue to evolve into our innovative all-SIM solution, allowing us to engage with a broader end-user base beyond those in the portable Wi-Fi terminals market. This pioneering all-SIM solution is uniquely poised to break cross-carrier restrictions and empower various smartphones. According to the Mobile Economy 2024 report from the GSMA, SIM connections, excluding licensed cellular IoT, are expected to increase from 8.6 billion in year 2023 to 9.8 billion by the end of the year 2030. Last but not least, within our IoT business line, we complete testing of our Soft CloudSIM technology for consumer IoT devices, which we expect to begin commercializing in the near future.

This unique technology is compatible with a broader array of mainstream chipset platforms found in many IoT devices and eliminates the need for hardware redesign or redevelopment, allowing global IoT manufacturers to seamlessly deploy it through software pre-installation. This turnkey solution is expected to create significant opportunities for us in the consumer IoT market by having our technology deployed in products such as walkie-talkie, security camera, and the two-wheel electric scooters, which already have a substantial end-user base and can significantly contribute to data connectivity services revenue. According to the Mobile Economy Year 2024 report from the GSMA, licensed cellular IoT connections are expected to grow from 3.5 billion in year 2023 to 5.8 billion by 2030. We believe that better connection empowers better life.

We recognize ourselves into four distinct business lines starting from year 2024 to leverage our existing R&D resources and cutting-edge technologies to explore business opportunities beyond portable Wi-Fi terminals and build an expanded array of comprehensive data connectivity solutions to satisfy a wide range of users' needs. By extending our business beyond the travel sector into various aspects of daily and commercial life, these solutions will allow us to engage with a broader end-user base by leveraging our CloudSIM and hyper-connectivity technologies. Our team will ultimately build out our broader GlocalMe ecosystem and global leading mobile data traffic sharing marketplace. Finally, I would like to review our guidance for the second quarter of year 2024. We are optimistic about our future growth prospects.

For the second quarter of year 2024, we expect total revenues to be between $22 million and $24 million, representing an increase of 0.1%-9.2% compared to the same period of year 2023. We maintain our outlook for the year, with total revenues expected to be between $95 million and $112 million, representing an increase of 11%-30.8% from year 2023. I will now turn the call over to Mr. Shi.

Yimeng Shi (CFO)

Thank you, Mr. Chen. Hello, everyone. I will go over our operational and financial timelines for the first quarter of 2024. Average daily active terminals, DAT, is an important operating metric for us as it measures customer usage trends over the period and is effective on our business performance. In the first quarter of 2024, average DAT was 309,906, of which 13,622 owned by the company and 296,284 owned by our business partners, representing an increase of 1.9% from 304,121 in the first quarter of 2023. During the first quarter of 2024, 57.9% of DAT was from uCloudlink 1.0 International Data Connectivity Service, and 42.1% was attributed to uCloudlink 2.0 Local Data Connectivity Service. In March 2023, the average daily data usage per terminal was 1.56 GB.

As of March 31st, 2024, the company had 178 patents with 141 approved and 37 pending approval. While the pool of SIM cards is from 382 MNOs globally as of March 31st, 2024, total revenue from the first quarter of 2024 was $18.1 million, representing an increase of 0.7% from $18 million in the same period of 2023. Revenue from service in the first quarter was $13.5 million, representing an increase of 4.8% from $12.9 million in the same period of 2023. Revenue from service as a percentage of total revenue was 74.7% during the first quarter of 2024, up from 71.7% during the same quarter last year. Geographically speaking, during the first quarter of 2024, Japan contributed 40.9% of our total revenue. North America contributed 16.8%.

Mainland China contributed 25.3%, and other countries and regions contributed the remaining 17% compared to 43.1%, 33.6%, 5.1%, and 18.2% respectively in the first quarter of 2023. Our gross profit rose to $10 million in the first quarter of 2024, representing an increase of 60.3% from $8.6 million in the first quarter of 2023. Overall gross margin in the first quarter of 2024 further rose to 55.2% from 47.8% in the same period of 2023. The gross margin on service increased to 65% in the first quarter from 60.5% in the same period of 2023. Excluding share-based compensations, total operating expenses were $8.5 million or 47% of total revenue in the first quarter of 2024 compared to $6.9 million or 38% of total revenue in the same period in 2023.

Net income was $0.4 million in the first quarter of 2024 compared to $2.1 million in the same period of 2023. Adjusted EBITDA was $1.7 million in the first quarter of 2024 compared to $2.1 million for the same period of 2023. For the first quarter of 2024, we achieved an operating cash inflow of $1.9 million, up from $1.6 million in the same period of 2023. For the first quarter of 2024, our capital expenditure was $0.6 million compared to $0.4 million in the same period in 2023. We maintained a solid balance sheet with cash and cash equivalents, increasing to $24.7 million as of March 31st, 2024, up from $23.4 million as of December 31st, 2023. With that, operator, let's open up for Q&A.

Operator (participant)

Certainly. 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 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 star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Theodore O'Neill from Litchfield Hills Research.

Theodore O'Neill (CEO)

Please go ahead. Thank you very much and congratulations on a good quarter. My first question is about the good profit margins in the quarter, and I was wondering if you could talk about why those numbers came in so well. Is it a pricing issue? Was it mixed? Give us some more detail on how you were successful in the gross profit margins in the quarter.

Yimeng Shi (CFO)

Yeah. Thanks, Theo. Let me answer the first questions. Yes. As we disclosed, there's a service gross margins improving significantly in the first quarter of 2024 from 64% to 65% on service part. The main attributions for this improvement is improving the proportions of international roaming service. As we there's a proportions is the DAT of the roaming service is more than 53%. And that's the major contributions from improving proportions roaming service. Yeah. That's a major contribution. Also, we disclosed our SaaS revenue in the first quarter improving compared with last year as well. So there's two sectors that have higher gross margins, which will contribute our significant improvement in our gross margins on service.

So looking forward to this year, we expect that as recovery is accelerated in international roaming travels, our roaming service revenue will be improving as in the past couple of quarters. So we expect this higher service gross margin will be maintained in the next couple of quarters until we have more revenue from the new product service related, for example, to GlocalMe SIM sales, which is a no-margins service. So overall, we expect this year the driver for this performance is the main driver is international roaming service. So that's my answer to your questions.

Theodore O'Neill (CEO)

Thank you. And my next question is about GlocalMe Life. I was wondering, in terms of expenses to launch that product, obviously, there's going to be some expense associated with the Paris launch of it. But is there any substantial CapEx or R&D expense that we should associate with this new product line, or is this primarily unlocking features that were already existing in the systems that you're selling?

Yimeng Shi (CFO)

Yeah. Let me answer this. Investments on this new product, GlocalMe Life, and now about opportunities for this new business. I will pass these questions to our CEO, Mr. Chen. So yeah. As we disclosed, we invest on this new product development. So in the first quarter of 2024, the headcount related to R&D is 148 headcounts, which is almost 10 more headcounts compared to the same period as last year's R&D. But the most headcount on investments is for sales and marketing departments. So for the end of the first quarter of 2024, the headcount for sales is 183 headcounts, which is 50 more than the headcounts of sales and marketing departments in the same period of 2023.

So we invest headcounts a lot on sales and marketing, which will support our unveil of opportunity in our traditional Wi-Fi business and also the new business as well. We launch three new business lines this year on the top of the Wi-Fi dongles. So I think pass the question to Mr. Chen to give more colors on this opportunity for GlocalMe Life.

Chaohui Chen (CEO)

Yeah. So for GlocalMe Life, we mentioned here, I think, a way we launch our product in the next week. So we have an event, a launch event in Paris in the Viva 23rd. So I think, of course, we increase R&D for the headcount, not so much, but more efficient. And also, we have used because majorly our R&D so during the COVID-19, we already do the R&D in these four product lines. Now is the time for we fruitful for the new product. So of course, I think we will continue to invest in this R&D, including the AI in the future. We already have a lot of research and R&D for not the current product but also in the long-term product. So we are around about 10%-50% of our R&D costs expending in the two or three years later business.

Theodore O'Neill (CEO)

Okay. Thank you very much.

Operator (participant)

Thank you. The next question comes from the line of Vivian Zhang from Diamond Equity Research. Please go ahead.

Hello. Hello. This is Vivian with Diamond Equity Research. Congratulations on the quarter. Most of my questions have been answered. I have a question regarding the selling expenses. So we see the company's S&M expenses increased over 38% in the quarter, while the product sales were down about 10%. So I'd like to know how you are allocating the resources to drive the product sales. Thanks.

Yimeng Shi (CFO)

Okay. Nice to further explain this expenditure related to the sales. Yeah. As I just mentioned in the previous questions, the sales expenses are increasing due to the headcounts. 50 more headcounts increased compared with the same period of last year. And the second is we invest additional $0.7 million on promotions and marketing like exhibitions. We mentioned Barcelona exhibitions and CES in America and also the marketing events, promotions on e-commerce platform. So we believe this promotion is beneficial to awareness of our brand name, GlocalMe.

And also, we prepare for launching the new product. We mentioned we have four business lines, and three business lines will be expanding and launch and commercialize in the near future. So we expect our revenue guidance for this year is we maintain this guidance for the whole year as mentioned by our CEO, Mr. Chen. So when our revenues increase in the next couple of quarters, I believe the OpEx margin will be lower and improving compared with the first quarter of this year. Thank you.

Chaohui Chen (CEO)

Let me add some color. So I think that totally, it's three points. The fourth point, our spending in the marketing sales size increases because of the recovery, our sales team and marketing worldwide for different countries after COVID-19. The first. The second, we are preparing the resource and the campaign for the headcount and in China market for the sales and marketing because the summer season is coming. We need a quarter early to prepare for all this resource and preparation. Number three is we prepare for the new product and for the event and spending also. This is a new product like eSIM, SIM card, and GlocalMe Life is more to say business, to consumer business. And that's totally new for us in some region. So we need to prepare for this marketing campaign. Yeah. Thank you.

Vivian Zhang (Equity Research Analyst)

Okay. Got it. Thank you. That's all. Thank you.

Operator (participant)

Thank you. Again, if you have a question, please press star, then one. The next question is from the line of Xin Lei from China Great Wall Securities. Please go ahead.

Xin Lei (Financial Analyst Assistant)

Yeah. Hi. This is Xin Lei from China Great Wall Securities. Many questions have also been answered before. I have a question and want to get more details because we got $18 million in the first quarter, and we expected to have the revenue between $22 million-$24 million. For the whole year, we also have a very positive expectation. So I want to know, do we have any foreseeable or stable sales orders for our new products?

Chaohui Chen (CEO)

Let me answer a bit first. For the guidance for the second quarter, about $22 million-$24 million. Yeah. The range of the outlook for the second quarter is we'll show small growth compared with the same period of last year, not very significant. But the peak selling time is the summertime, which is the third quarter. And also, we have a launch of new product in this May. We have an event in Paris where we'll launch this new product, GlocalMe Life-related products, in Paris this month. So we expect that all the new product sales will generate into revenue accounts in third quarter and fourth quarter as well. So we maintain the whole year's guidance, which is $95 million-$112 million.

Yimeng Shi (CFO)

Yeah. So add some more comment. Our traditional portable Wi-Fi business is very stable growth because we can see in the first half years, Japan and China are major markets. So I think the global travel is no growth as we expected. It's slightly growth. It continued growth, but the recovery speed is lower than our expectation. So that's one of the reasons. And for the new product, so we just launched in the second quarter, and we generate the revenue from the Q3, Q4. Majorly, I think it comes from Q4 because this new product, they are a big potential. So that's why we also there is some uncertainty. So that's why we still keep the same forecast.

Xin Lei (Financial Analyst Assistant)

Okay. Yeah. Thanks for the answer. I have no questions. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, there are no further questions at this time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Liam Xie (Head of Investor Relations)

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.

Yimeng Shi (CFO)

Thank you.