uCloudlink Group - Q3 2023

Transcript

Operator (participant)

Hello, and welcome to the uCloudlink Q3 2023 earnings conference call. All participants will be in 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. To ask a question, you may press star, then one on your touchtone phone. Please note, this event is being recorded. I would like now to turn the conference over to Jillian Zeng. Please go ahead.

Jillian Zeng (Director of Investor Relations)

Hello, everyone, and thank you for joining us on uCloudlink Q3 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 co-founder and Chairman of the 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 Q3 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 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 contrary 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 today's conference call include discussions of unaudited GAAP financial information and unaudited non-GAAP financial measures.

uCloudlink's press release contain a reconciliation of the non-audited non-GAAP measures to the most directly comparable non-audited GAAP measures. I will now turn the call over to Mr. Chen. Please go ahead.

Chaohui Chen (CEO)

Thank you, Jillian, and good morning, everyone. Thank you for joining us today. We appreciate everyone taking time. We delivered another strong set of results during the quarter, highlighted by a 31% year-over-year increase in total revenues to $20.9 million, and a sixth 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-over-year to $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 chose 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, products services offerings, and value-added services.

During the quarter, we consolidated our leading position as a 5G Roaming solution provider, as cross-border travelers continued to discover our 5G portable Wi-Fi terminals, 5G terminal packages, and the unparalleled user experience they provide. One of our most popular mobile Wi-Fi devices is now equipped with an artificial intelligence services assistant, especially provided for Chinese cross-border travelers. Means that our products are not just data traffic connectivity terminals, but also intelligent travel assistants. We launched the Global SIM card, which currently offers coverage across 10 high-demand travel destinations, and a GPS-tracker-enabled portable Wi-Fi terminal that we believe is currently the smallest of its kind in the world. In addition, we piloted an eSIM solution on, in October 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, or IoT, solution, are key part of this strategy. During the quarter, third-party devices utilizing uCloudlink's CloudSIM technology, powered by IoT solutions, went to the market in Japan. Besides embedding our IoT modules in the third-party devices, we also expect to cooperate with major IoT module manufacturers on integrated CloudSIM technology.

We also continue to conduct commercial testing of our high-performance 5G customer premises equipment, CPE, which we expect to launch in the near future. The upgraded CPE provides home and office internet connection that seamless between the fixed and mobile networks, make it a reliable substitute for traditional fixed broadband offerings. We believe this new offering will bolster uCloudlink's positions in the fast-growing market for home and office internet connectivity, helping us expand our user base and gain additional market share in the fixed broadband market. In addition, we launched retail sales of our GPS-enabled portable Wi-Fi terminals in Hong Kong during this quarter, which marks the beginning of our new efforts to provide more daily life services.

We believe these GPS-enabled devices will become an indispensable assistant in consumers' daily lives, offering an easy way to keep a track of personal belongings, monitor the location of family members, including elderly relatives, kids, and pets. As I mentioned before, our offerings include CloudSIM products, the GlocalMe SIM card, and an eSIM solution, and we plan to launch various HyperConn solutions compatible with CloudSIM, SoftSIM, and eSIM technology in the future. To sum up, we believe our new offerings open up a new range of application scenarios for our solutions and hold significant long-term growth potential. Many of these solutions are designed to generate not just revenue from sales products and data connectivity services, but also PaaS and SaaS revenue that recur on a monthly, quarterly, and annual basis.

Our team is working diligently to expand our offerings to serve a broader customer base and a wider variety of user use cases. We also believe that we are well-positioned to create a 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 Q4 of 2003, uCloudlink expects-...

total revenues to be between $22 million and $26.2 million, representing an increase of 12.2% to 33.7% increase compared to the same period of 2022. I will now turn the call over to the Mr. Shi.

Yimeng Shi (CFO)

Thank you, Mr. Chen. Hello, everyone. I will now walk you through our operational and financial highlights for the Q3 of 2023. Average daily active terminal, DAT, measures customer usage trends and reflects the overall performance of our business. In the Q3 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 quarter of 2023. Average daily data usage per terminal was 1.56 gigabytes in September 2023.

Total revenue for the Q3 of 2023 were $23.9 million, representing an increase of 31% from $18.2 million in the same period of 2022. Revenue for service were $16.6 million, an increase of 31.9% from $12.6 million in the same period of 2022. Revenue from service as percentage of total revenue was 69.7%, up from 69.2% during the same period of 2022.

During the Q3 of 2023, as a percentage of total revenue, Japan contributed 44.2%, North America contributed 26.3%, Mainland China contributed 17.2%, and other country and the 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 they increasingly resumed outbound international travel. Overall, gross margin was 51.2% in the Q3 of 2023, as compared to 43.7% in the same period of 2022.

Gross margins on service was 35.9% in the Q3 of 2023, as compared to 37.9% in the same period of 2022. Excluding share-based compensations, total operating expenses were $8.7 million, or 36% of total revenue in the Q3 of 2023, as compared to $3.3 million, or 40% of total revenue in the same period of 2022. We record net income of $3.5 million in the Q3 of 2023, as compared to a net loss of $4.6 million in the Q3 of 2022. Adjusted non-GAAP EBITDA improved to $4.1 million during the Q3 of 2023, as compared to $0.9 million in the same period of 2022.

We achieved positive cash, operating cash flow of $2.8 million during the Q3 of 2023, as compared to $1.2 million during the same period of 2022. We successfully achieved positive cash flow from operation for a sixth consecutive quarters, accumulating operating cash flow inflow of $16.7 million through the previous six quarters. In sum, our financial performance continued to improve during the Q3s, and we believe that we are well positioned to execute on our strategic growth initiatives. With that, operator, let's open up for Q&A.

Operator (participant)

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 comes from Vivian Zhang from Diamond Equity Research. Please go ahead.

Vivian Zhang (Equity Research Analyst)

Hello, this is Vivian Zhang with Diamond Equity Research. Congrats on the 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 trend sustainable? Thanks!

Chaohui Chen (CEO)

... Thanks, Vivian. I answer your first question regarding the improvements on gross margins. As you see, the overall gross service margin improved a lot compared the same period last years. The major contributions came from the sales of the products, the mix of sale products. So there's improvements on the sales products as they contribute overall for our this quarter's gross margins. For service gross margins is a similar level, a little bit fluctuations, compared with the same period last years. So, looking forward, we, as we can expect the recovery in the national travels resumes in the following years. So we are under international connectivity service.

The gross margin is one of our highest gross margins in our categories. So we expect this service gross margins will keep this to similar high level in the Q4 of this year. And for sales products, it depends on the mix of products selling to the customer. But that's within this sales product gross margins, where will be a carry ons, depends on the mix of product sold. Thank you.

Vivian Zhang (Equity Research Analyst)

Okay. Got it. Thank you. 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 drive the company's growth?

Chaohui Chen (CEO)

Yeah. So, you know, first, I think the launch the 5G this year, 5G product this year, in the last quarter, so in the Q2, so quite successful. This is the world-leading first world 5G global roaming free roaming high performance Wi-Fi. This help us achieve quite a good market share, because currently this almost the only one only one portable Wi-Fi available in this market for global roaming. And that's first. And second, we launched a smallest like a business card 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 small Wi-Fi together, provide more flexibility to meet the various needs of the family package. For example, the family, several family members, they can use one package for big device, or you can independently use the smaller device. So that means get more attractions and give users more flexibility. That's a second product we launched in the Q3. Another product, for example, we provide artificial intelligence into our Wi-Fi. That means, you know, for Chinese traveler, they are hard to use, like, ChatGPT. Like ChatGPT in China is difficult, and because you need a foreign number to register, et cetera. This barrier is there.

With our solution, we're working with the service provider to provide artificial AI into our MiFi. And then our user travel from China to outside to the world, they can use the ChatGPT so freely. So I think that can enhance our service ability. By the way, so we also provide a more SIM card business, because I know that many people, they know, even the portable Wi-Fi can provide the best connection, but some users still want to use a simple solution, not willing to carry extra device.

For this scenario, we provide a SIM card business for them, and our SIM card business can download the different countries, you know, portfolio, and also is combined with our CloudSIM enable these devices. Only with the same card, they can free roaming in more than 10 country. I believe in the foreign quarter, we are providing more countries, and this will meet more customer need for more convenience for people who are not willing to bring the 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 power calling, and these kind of services can help the Chinese and foreigners, more easily, more convenience, during their travel. So all this is a product, for our 1.0 business. And also, so we launched 4G and 5G CPE. 4G already launched, in the world, the first, high reliable, you know, CPE. This can help the fixed network become more reliable. No matter the fixed network, how reliable, there are some periods in the years, yearly, there's some broken, some drop.

You can use the multi mobile network to enhance to guarantee provide the most strong backup or disaster recovery for fixed network. That's our quite unique solution in for fixed mobile broadband. And this also help us to consolidate always the better connection brand and the services. And the final one, we also launched our CloudSIM into the IoT, service, like in Japan announced. And also the more and more module and understand our value for the cross-carrier and also the global roaming free. And this can provide all of these smart device, international and locally, get the best reliable connection. That's basic need for smart intelligent device. This market share also solutions get more and more attraction for the end users.

So, all these five 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 compare with the before, before COVID-19. Our market share for MiFi rental business in China is higher than year 2019. So even though in China, the recovery of the international business is soft. It's not so, you know, it's not so quick as we expect, around a 30% recovery so far, but we still achieved a big market share and good result. Thank you. That's my-

Vivian Zhang (Equity Research Analyst)

Okay.

Chaohui Chen (CEO)

Answer.

Vivian Zhang (Equity Research Analyst)

Okay, okay. Then that makes sense. Thank you so much for the detailed information. That's all my question. That's all.

Operator (participant)

The next question will come from Theodore O'Neill of Litchfield Hills Research. Please go ahead, Theodore.

Theodore O'Neill (CEO & Senior Equity Research Analyst)

Thank you. Thank you very much, and congratulations on the 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 two things be related? Does it have any meaning that one's much larger than the other?

Chaohui Chen (CEO)

Hi. Thanks, Theo, questions. Let me first explain a bit for this, the two metrics. Yeah, there's the, you mentioned, the metrics is the daily active terminal, right? The daily active terminal-

Theodore O'Neill (CEO & Senior Equity Research Analyst)

Yes.

Chaohui Chen (CEO)

We achieved a new highest of over 320,000. Compared with last year, this figure is increased by about 9.3%. It seems not a very significant growth, but our revenue generation is quite stronger compared with this growth rate in terms of daily active terminal. That means daily activity is a very important operation metrics. We give our hints how whether our user or 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 a strong indications of how revenues generation and grows in the future. So that, the figures tell us in the future, in this level, 320,000, that's the daily active terminal, support our generate revenue, in a very fast growth pace. So we are. 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 belong to the market and will support our more active terminal in the market. So our growth will be growth. Our revenue will so it's revenue will growth as well when we, the daily active terminals, grows.

Theodore O'Neill (CEO & Senior Equity Research Analyst)

Okay. Okay, that, I understand. The next question is about the IoT. Okay, so in your prepared remarks, you've talked, 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 this IoT, or is it broad-based?

Chaohui Chen (CEO)

Yeah. Well, our IoT, I think for Japan case, is achieved by a partner. It's they apply this solution for the end user in the end user. So for the loader, try to enhance the, you know, the reliability of the network connectivity. Potential is big. So that's the first phase launch, and we believe they will launch the more bigger scale in the future. And that's for the IoT we were in Japan case. And also, I just mentioned, we embed our solution into the module manufacturer. That means, our, you know, CloudSIM technology embed into the module manufacturer achieve progress.

I think, as more and more module providers embed our GlocalMe inside, so I believe this smart module now that it's your SIM card put inside, and we provide a better connection, more network connection, and a worldwide connection for this smart device. That is become more and more a strong need, I understand for this smart device. For example, like the smart car, like this smart charger, power battery, smart power battery, they are worldwide ship to the worldwide, but they need to be monitored. They are this factor, and they are performance, performance. So I think we provide this best connection and also a very competitive connection.That's why I believe in this part, and in the next year and in the following years, we will achieve the big, you know, number of the connections.

Theodore O'Neill (CEO & Senior Equity Research Analyst)

My last question is about cash balance. You're building a good size cash balance here. I wonder if you have plans for acquisitions, or dividend, or similar?

Chaohui Chen (CEO)

Yeah, you see, as we launch, we achieve a positive cash flow from operations for a sixth consecutive quarter. Accumulating operating cash inflow of $16.7 million through the previous six quarters. So our cash balance now is over $20 million. So that, that's... Yeah, we achieve in terms of growth rates is quite good. We will, we expect we'll keep this trend to generate more cash flow from operations to further improve our financial positions. That's our, we want to have enough cash balance to support the company to grow and expand in the future.Now, so far, we don't have the target to announce to do some acquisitions, this kind of things. We still focus our performance to generate more cash flows to enhance our financial position. Does that answer your question?

Theodore O'Neill (CEO & Senior Equity Research Analyst)

Thank you very much.

Chaohui Chen (CEO)

Yeah, I think, yeah, I think it was. I believe so. I think our business, one point I'll put it out, and also the following new product launch, I believe we will generate more revenue, of cash. That's a good business. So, we are first is try to make the company more stronger, more healthy, first step. And the second, also we consider any potential opportunity in the future. So we're just in the consideration, but I think the first step is make the company more stronger, more healthy. That's our preferred thinking.

Theodore O'Neill (CEO & Senior Equity Research Analyst)

Okay, thank you very much. That completes my questions.

Operator (participant)

As a reminder, if you have a question, please press star then one to enter the queue. 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 (Director of Investor Relations)

Well, 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 contact our investor relations firm, Christensen Advisory. We look forward to speaking to you all again on our next quarterly call. Thank you.

Operator (participant)

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