uCloudlink Group - Q3 2022

Transcript

Operator (participant)

Hello, and welcome to the uCloudlink Group Inc. third quarter 2022 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jillian Zeng, Investor Relations of the company. Please go ahead.

Jillian Zeng (Investor Relations)

Thanks everyone for joining us on our third quarter 2022 earnings call today. The earnings release is now available on our IR website at ir dot ucloudlink dot com, as well as our Newswire service. I will give a brief introduction to our uCloudlink management team. Zhiping Peng is our Co-Founder and Chairman of the Board of Directors. Chaohui Chen is our Co-Founder, Director, and Chief Executive Officer. Yimeng Shi is our Chief Financial Officer. Zhu Tan is our Vice President of Marketing and Sales. Our CEO will begin with an overview of our company and the business highlights, which will cover section one of the earnings presentation posted in our IR website. Our CFO, Yimeng Shi, will then discuss our operational highlights and financial results as presented in the sections two and three.

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, 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, as well as 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)

Yes, thank you, Jillian. Pages 4- page 12 are similar contents as the earnings presentation of the second quarter of 2022. We still encourage you to review in the third quarter of 2022 earnings presentation uploaded to our investor relations website with some latest updates. Hence, I will focus on our most recent developments in the third quarter. Let's move to page 13. uCloudlink 1.0 is our international data connectivity services business, which has had a strong track record of high growth margins and profitability with ongoing growth potential. During the third quarter of 2022, our 1.0 business revenues increased by 30.1% compared to the same period of 2021.

The revenue of our 1.0 business in our Japan and Southeast Asia market increased significantly, and in Mainland China market recovered slightly during the third quarter of 2022, year-over-year. International travel restriction around the world continued to abate over time across our major international markets, with North America opening, followed up by Europe and later Southeast Asia. One of our key markets, Japan, has also recently announced the lifting of restrictions for foreign travelers effective this October. Consequently, the number of average daily active terminals for the 1.0 business has increased during the third quarter of 2022. Compared to the third quarter of 2021, average daily active terminals for the 1.0 business has increased by 25%. Showcasing the accelerated recovery of the demand of the uCloudlink's high-quality international data products and services.

Currently, we are providing reliable and high-quality international data connectivity services in more than 140 countries, powered by our PaaS and SaaS platform, enabling single operator entry point to access more than 300 global mobile network operators available network. Going forward, I will remain positive that our 1.0 business will continue to be the key growth driver of our revenues as well as bottom line results. Let's move to page 14. uCloudlink 2.0 is our local data connectivity services business, and has become a new driver of revenue growth since the year 2020. Its growth is built upon our efforts in exploring market opportunities such as the post-pandemic new normal lifestyle that people are getting more and more used to. The development of 5G applications and in the IoT area, our ability to improve network convergence and data connections.

The cooperation with the intelligent hardware manufacturers to implement GlocalMe Inside, et cetera. In the past quarter, we have continued to strengthen our presence in our existing markets, including Japan, North America, South Asia, where we help operators and business partners improve their data connectivity services and solve data connection problems through our PaaS and SaaS platforms based on our patent technologies including the CloudSIM and HyperConn technology solution. As we share in our last quarter, we take pride into our ability to adapt ourselves to the evolving market by introducing and upgrading innovative products to address various 2.0 business applications scenarios. Our 2.0 business revenue report a 38.7% increase during the third quarter of 2022 compared to the same period in prior years.

Our customers are able to realize reduced operating costs and improve data connectivity experiences through these cutting-edge IoT solutions. We continue to focus on exploring new business prospects to serve a broader spectrum of partners with IoT needs. For example, uCloudlink is cooperating with a global leading cloud platform to provide better connectivity services for its smart farming. During the third quarter, we have extended efforts into upgrading our current portfolio of offering to provide a better connecting experience for IoT customers and prepare these products and solutions for more diverse application scenarios. We expect our 2.0 business to close with the support of our innovative CloudSIM and HyperConn technology as we continue to introduce our solutions, services, and products to the market and strengthen our collaborations with the local partners. Let's move to page 15.

uCloudlink positions itself as a pioneer technology solution provider in the data connectivity market. Based on the mature 1.0 business and newer 2.0 business, we promote the long-term development of our PaaS and SaaS ecosystem, which has been recognized by various business partners. We remain confident in our business development teams and empower the building of our PaaS and SaaS ecosystem, and in our research and development team to address diversified needs to our customers posed to us. We are more than pleased to announce that we maintain a positive operating cash flow for the second consecutive quarter during the third quarter of the year 2022, and we successfully achieved a positive adjusted net income, non-GAAP, for the first time since the global outbreak of the COVID-19 pandemic in the second quarter of year 2020.

Our total revenue reached $18.2 million during the third quarter of 2022. For the fourth quarter of 2022, we expect we would further improve our total revenue to be between $19 million and $22 million. Representing an increase of 8%-25% compared to the same period of 2021. We expect these improvements will allow us to build a more solid financial and operational position to fuel better results in the future. We believe that connecting to better connection, uCloudlink is a significant driving force in the transformation of increasingly advanced information era. We are committed to build a more connected future for more customers and users, and we strive to make a positive impact in serving the global user community.

I will now turn it over to our CFO, Yimeng Shi, who will go through business and financial highlights.

Yimeng Shi (CFO)

Thank you, Mr. Chen. Hello, everyone. I will quickly go over our business highlights for the quarter ending September 30, 2022. Let's now turn to page 17. Average daily active terminals for the third quarter were 297,501, of which 1,522 owned by the company and 295,979 owned by our business partner, representing an increase of 16.2% from 256,124 in the third quarter of 2021. Our uCloudlink 2.0 service accounted for around 65% of the total DAT during the third quarter of 2022. Average daily data usage per terminal was 1.771 GB in September 2022.

Let's now turn to page 18, which shows global diversification of our business. We had around 98% of the total revenue from outside Mainland China. During the third quarter of 2022, Japan contributed to around 35.1% of our total revenue. For other countries' revenue, the North American market had the largest contribution to our business, reflecting the further development of our North America business. We will continue to expand other markets such as Europe and Southeast Asia, et cetera. During the third quarter of 2021, we had 3.3% of total revenue coming from Mainland China, 46.6% of the total revenue coming from Japan, and 49.7% of total revenue coming from other countries and regions. Let's now turn to page 20. I will go through our financial highlights of the third quarter of 2022.

Service-related revenue as a percentage of total revenue was 69.2% during the third quarter of 2022, compared with 34.2% during the third quarter of 2021. Revenue from international data connectivity service and local data connectivity service increased by 30.1% and 38.7% year-over-year, respectively. This increase in revenue from data connectivity service was mainly attributable to the gradual recovery of international travel and the continuous development of our local data connectivity service business. Let's move to page 21, which shows the revenue breakdown of our two business segments, namely revenue for service and sales products.

Our total revenue decreased by 5.7% from $19.3 million in the third quarter of 2021 to $18.2 million in the third quarter of 2022, primarily due to the decrease in sales of certain terminal and data-related products. However, revenue from service was $12.6 million, representing an increase of 20.5% from $10.5 million from the same period of 2021. This increase was primarily attributable to increase in revenue from international data connectivity service and the local data connectivity service. Let's turn to page 22 for gross margins of our business. Our service gross margins increased to 57.9% in the third quarter of 2022 compared to 43.5% in the same period of 2021.

Our overall gross margins was 47.7% in the third quarter of 2022, increased from 28.3% during the same period of 2021. The increase of our service gross margins during the third quarter of 2022 was primarily attributable to higher margin profile from international data connectivity service. Let us move to page 23, which shows the breakdown of our operating expenses, excluding share-based compensation and others. Excluding share-based compensation, operating expenses as a percentage of total revenue was 40% in the third quarter of 2020, compared with 61% during the same period of 2021.

We have further streamlined our business operations, including optimizing labor costs, and our total operating expenses, excluding share-based compensation, decreased to $7.3 million in the third quarter of 2022, compared to $11.8 million in the same period of 2021. Next slide, turn to page 24. Operating cash flow maintained positive for the second consecutive quarter during third quarter of 2022, and was $1.2 million compared to a negative $5.7 million during the same period of 2021. This is primarily a result of our ongoing efforts to improve our margin profile and control operating expenses. Our cash and cash equivalents and short-term deposits were $12.5 million as of September 30, 2022. Our CapEx was $0.1 million compared to $0.3 million in the same period, 2021.

Next slide, move to page 25. Net loss during third quarter of 2022 was $4.6 million compared to $7.0 million during third quarter of 2021. Adjusted EBITDA non-GAAP was $0.9 million during the third quarter of 2022 compared to negative $4 million during third quarter of 2021. We successfully achieved a positive adjusted net income non-GAAP and adjusted EBITDA non-GAAP for the first time since the global outbreak of COVID-19 pandemic in the second quarter of 2020. As I mentioned about, the company is working towards improving its bottom line results and financial position. In October, we announced the early redemption of the convertible debenture due to our increasing confidence in the improved financial position.

We are confident in the company's capability to execute the strategies to further enhance our financial and operational position. With that, let me conclude today's presentation. Thank you, and we start our Q&A session.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're 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 Vivian Zhang with Diamond Equity Research. Please go ahead.

Vivian Zhang (Equity Research Analyst)

Good morning. Congrats on that quarter. My first question is that what's the reason why the company can continue to generate positive operating cash flow for the second consecutive quarter? How will this affect the company?

Yimeng Shi (CFO)

Yeah. This is Yimeng Shi, I'm answering the questions. Yes, this second quarter, we maintain this positive operating cash flow following the second quarter of 2022. The main reasons that came from the two. The first was, margin profiles has been improving quarter-over-quarter, as we illustrate on our presentations, our service gross margins and overall gross, overall gross margins is reach the highest levels. That contributes to our gross profit amount increase significantly. The second point is our, we have maintained and control our operations process. We streamline our operations.

As we demonstrate, our operating expenses has been decreased significantly compared to the same periods last years. That's the two main contribution to our second quarter's positive cash flow. We expect this trend, the positive operating cash flow will be achieved in the fourth quarter of this year. We believe our financial position has been improving and support our growth in the future.

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

Yeah. By the way, our international business recovery. This is a high-margin business, also help to, you know, to get more, you know, high-margin business.

Vivian Zhang (Equity Research Analyst)

Okay. Got it. Can you share with us what measures have you taken to control costs and achieve positive adjusted net income and the EBITDA?

Yimeng Shi (CFO)

Yes. The similar reasons as our positive operating cash flow. The gross margin overall improved a lot, and our operating expenses have been decreased at the same time as well. We combine combinations together, we will achieve a positive adjusted net income.

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

A positive adjusted EBITDA. We expect this improvement will be carry on in the fourth quarter and the next year as well. The company's financial position will be improving on this basis.

Vivian Zhang (Equity Research Analyst)

Okay. Can you elaborate on like what specific measures you've taken, like to decrease the operating expenses? 'Cause we saw that operating expenses decreased a lot, but what measures have you taken?

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

Yeah. There is, as we in the earnings release, the main decrease in amounts came from the headcount-related costs. Now that's the numbers of our headcounts has been reduced compared with the same period last year. We report that the headcount numbers in the presentations is around 300. Compare with last year, the number of headcount has been decreased. Our efficiency, our operational efficiencies has been improved. This number of headcounts could support us to achieve the year-end outlook and also could achieve our growth in the next years as well.

Vivian Zhang (Equity Research Analyst)

Okay, got it. My last question is that, compared with the Japanese and Chinese markets, the proportion of revenue from North America has increased a lot this year. Can you share with us the growth of the North American markets and what are the drivers for the growth there?

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

Yeah. I'm Charles speaking. North America is, you can see in our data, our North American market increased quite a lot. From last year, about several million to this year, we forecast more than 10 million. That's a big increase. There are several reasons. One is U.S. is recovering from the COVID-19, so the requirement for the international traveler become more and more popular. That's one reason. The second reason is U.S. market, the coverage of network is not as good as it is in China and Asia. People need a better coverage, and thus the traffic jams in local network. That's increased especially for 5G, the coverage is poor.

We launched the world-first 5G solution MiFi solution in United States. That got popular in this market. The third the local market including IoT and including the local requirement for the better coverage. It's getting more and more, I think more and more, industry and people need a better coverage for providing a better service. These three key reason let us because our product can provide the best coverage compare other product. We win a more and more market share in this market.

Vivian Zhang (Equity Research Analyst)

Okay, got it. Can you share with us like who are the main competitors of you in the North American market?

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

Yeah. There are in different area we have different competitor. There are some we have some competitor like Skyroam. They are similar technology, but you know we can provide much wider product line and much better quality because we come from the telecom industry, and we understand the quality is how important to the market. So we invest a lot in our product. That's why we are currently the only one vendor who can provide a global 5G roaming solution. No other product can provide. That's a case. The other case is our product is a bestseller for the CloudSIM technology in the Amazon market. You can see our market share there.

Also our customer understand our quality product patent is in a leading position in this market. This help us quickly, you know, exploring the U.S. market and the market share increased very quickly.

Vivian Zhang (Equity Research Analyst)

Okay, I see. Thank you. That's all my questions.

Operator (participant)

Again, if you have a question, please press star then one. 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 (Investor Relations)

Okay. Thanks everyone for joining us. If you have any questions, please contact uCloudlink Investor Relations through the contact information provided on our website, or contact our investor relations firm The Equity Group. Thank you, everyone.

Operator (participant)

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