uCloudlink Group - Q4 2022

Transcript

Operator (participant)

Welcome to the uCloudlink Group Inc fourth quarter and full year 2022 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 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 of Investor Relations. Please go ahead.

Jillian Zeng (Investor Relations Officer)

Thanks, everyone, for joining us on our fourth quarter and full year 2022 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com, as well as via Newswire service. I will give a brief introduction to our uCloudlink management team. Zhiping Peng is our Co-founder and Chairman of 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, Chaohui Chen, will begin with an overview of the company's recent business highlights and uCloudlink's 2023 business outlook, which will cover the earnings presentation posted on our IR website. Our CFO, Yimeng Shi, will discuss company's operation 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'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, retrospective, 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 includes discussions of the non-audited GAAP financial information as well as non-audited non-GAAP measures. uCloudlink's press release contain reconciliation of non-audited non-GAAP measures to the non-audited 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 (CEO)

Thank you, Jillian, and good morning, everyone. Thank you for joining us on our year-end 2022 earnings call today. We are appreciate everyone's time. 2022 was truly a pivotal year for uCloudlink, characterized by achieving great success and overcoming tremendous challenges. We are pleased to have achieved positive operating cash flow of $4.4 million for the year end December 31st, 2022, a significant milestone for our company, as this is the first time we have done since the COVID-19 pandemic. Having overcome the difficulties we faced during the COVID-19 pandemic and working to strengthen the diversity of our business, as well as increasing its resilience with new growth opportunities, we are excited about the company's long-term growth prospects and believe we are well-positioned to be an industry leader.

uCloudlink 1.0 is our international data connectivity services business, which tends to be a higher margin lines of business, and one which we believe will continue to be a key growth driver for the company. During the fourth quarter of 2022, uCloudlink 1.0 business revenues increased 48.2% year-over-year to $7.7 million. For 2022, uCloudlink 1.0 business revenues increased 29.6% year-over-year to $28.1 million. This improvement is a reflection of international traveler recovering across our major markets over the course of the year. This was accompanied by an increase in average Daily Active Terminals for uCloudlink 1.0 business. During the fourth quarter and full years, year 2022.

Average Daily Active Terminals increased 20.5% year-over-year in 2022. In 2022, we have become a leading 5G roaming solution provider in the wireless network industry, and have continued to provide reliable and high-quality international data connectivity services in more than 140 countries, enabling single operator entry point to assess more than 300 global mobile network operators available networks. uCloudlink 2.0 is our local data connectivity services business, which has been a significant driver of revenue growth since the year 2020.

Over the past two years, we have continued to strengthen our presence in market like Japan, North America, Southeast Asia, where we have helped operators and business partners improve their data connectivity services and resolve data connection problems through our PaaS and SaaS platform based on our patented technology, including Cloud SIM and HyperConn technology solutions. Our uCloudlink 2.0 business report $7.4 million in revenues, up 55.5% in 2022 from $4.7 million in 2021. On the Internet of Things, IoT side, our customers were able to realize reduced operating costs and improve data connectivity experience through these cutting-edge IoT solutions. We continue to explore opportunities where we can broaden the applications of our technologies for partners with IoT needs.

Covering application scenario like a Wi-Fi router, IP camera, and electric vehicles. We continue working to close our uCloudlink 1.0 business, strengthening our leading global position in the international data roaming solutions market. Since the beginning of year 2023, we have observed an accelerated recovery in international travel. The United Nations World Tourism Organization expects 2023 international tourist arrival number will recover about 80% to 95% of pre-pandemic levels, which presents a significant opportunity for us. Following China moving away from the zero COVID-19 policy and the subsequent opening of the national borders, we act quickly to establish provider data solution coverage at many of our partner airports, airlines, and travel agents, allowing us to meet the recovering demand for uCloudlink 1.0 roaming business in China, Malaysia, and Singapore.

We believe the improving macro environment represent a greater upside for uCloudlink 1.0 business in 2023, and we will continue strengthening our leading position as a 5G roaming solution provider, and launch uCloudlink 1.0 products and solutions, such as the eSIM solutions, to satisfy the various needs of our customers and users in multi-industries. For the uCloudlink 2.0 business, we have gained more industry recognition, and have continued to expand our PaaS and SaaS platform ecosystem. While continuing to establish a nature customer relationship for the uCloudlink 2.0 business in existing key markets like Japan and North America. We have gotten a more industry recognition in China, which is expected to accelerate uCloudlink 2.0 business growth.

In January 2023, our Wireless Multi-Network Intelligent Connection Engineering Technology Research Center was approved as one of the Guangdong Province Engineering Technology Research Center by the Department of Science and Technology of Guangdong Province. We believe this recognition serves as a testament to our continued technology advancement in mobile and data connectivity technologies, and brings a new momentum for uCloudlink to expand our presence in the Mainland China market and beyond. In the IoT side, the company continues to serve existing partners with our superior, more reliable mobile network solutions, while proactively exploring opportunities in new industries and new application scenario, including augment reality, AR, and virtual reality, VR, electric vehicles, et cetera. We expect to make a breakthrough in Japan market, where we have a strong presence.

Helping business partners to further improve their data connectivity experience in the IoT field. We remain on track in the long-term development of our PaaS and SaaS platform ecosystem, which we believe is key to the success of our mobile data sharing smart space. With that, I would like to touch on uCloudlink near-term initiative, uCloudlink 3.0, to initiate a mobile data traffic sharing marketplace application based on our efforts in building a scalable user base through our uCloudlink 1.0 and 2.0 models. This marketplace enables an user's device to connect to any available network anytime and anywhere utilizing the global GlocalMe app.

The GlocalMe app is designed to support various application scenario without the limitation of the device, including top up-and-go GlocalMe terminals, active-and-go eSIM, GlocalMe data application-only solution, GlocalMe SIM, GlocalMe inside the third-party device, mobile Wi-Fi rental, et cetera. Backed by our Cloud SIM, HyperConn, and Web 2.0 technologies, we aim to build a data traffic marketplace for operators, customers, and users, where data traffic can be shared simply and efficiently via day-to-day market behavior. Once this marketplace application launch in near future, we expect to continue to make investments into optimizing the system on an ongoing basis, incorporating more state-of-the-art technologies, such as blockchain technology. We are commit to continuous development of innovative solutions and plan to expand our Cloud SIM and HyperConn technology solutions to various application scenario, including media, video conference, outdoor live broadcasting, et cetera.

Based on these innovative Cloud SIM and HyperConn technology solutions, we expect to launch more innovative products catering to the needs of a diverse set of enterprise and individual customers in year 2023. One of which is the one that data connectivity solutions application I mentioned earlier, the GlocalMe app on various smart hardware supporting various type of SIM. Finally, I will briefly discuss guidance for year 2023. For 2023, we expect total revenues up between $85 million and $100 million, representing an increase of 19.90% to 40.1% compared to 2022. We expect to build a more solid financial and operational position to fuel better results in the future.

We are pleased with our achievements in 2022. I would like to extend a heartfelt thank you to all the uCloudlink team members for their efforts and dedications to strengthening our company. We feel confident in the opportunities and challenges ahead of us in 2023, leveraging our portfolio of advanced technology offerings and more mature commercial experience. Then look forward to continuing to serve our customers and partners throughout our global markets. uCloudlink remains focused on scaling our user base and constantly improving the technology and business operation model to build a mobile data traffic sharing marketplace, which will fuel the company's long-term growth. I will now turn the call over to our CFO, Yimeng Shi.

Yimeng Shi (CFO)

Thank you, Mr. Chen. Hello, everyone. I will go over our operational and financial highlights for the fourth quarter and full year of 2022. Average Daily Active Terminals, DAT, is an important operating metric for uCloudlink as it measures customer usage trends over each period, which is reflective of our ongoing business environment. In the fourth quarter of 2022, average Daily Active Terminals were 297,884, of which 2,299 owned by the company, and 295,585 owned by our business partner, up 12.2% from 265,595 in the first quarter of 2021.

Our uCloudlink 2.0 service accounted for around 62.1% of the total DAT during the first quarter of 2022. Average daily data usage per terminal was 1.68 GB in December 2022. Total revenue for the fourth quarter of 2022 were $19.6 million, representing an increase of 11.6% from $17.6 million in the same period of 2021. Revenue from service in the fourth quarter of 2022 were $12.5 million, an increase of 30.3% from $9.6 million in the same period of 2021. Revenue from service as % of total revenue was 63.9% during the fourth quarter of 2022, up from 54.8% during the same period of 2021.

During the fourth quarter of 2022, Japan contributed approximately 43.7%. Mainland China contributed 3%, and other country and regions contributed 53.3% of total revenue compared to 37.4%, 3.1% and 59.5% respectively in the same period of 2021. Overall gross margin improved to 51.3% in the fourth quarter of 2022, compared to 31.0% in the same period of 2021. Our gross margin on service increased to 59.4% in the fourth quarter of 2022 compared to 46.1% in the same period of 2021.

Excluding share-based compensations, our total operating expenses decreased to $10.4 million, or 33% of total revenue in the fourth quarter of 2022, compared to $10.9 million or 60% of total revenue in the same period of 2021. As a result of a more favorable business mix and a significantly decreased operating expenses, we report narrow net loss of $1.1 million in the first quarter of 2022, compared to a net loss of $15.5 million in the same period of 2021. Similarly, adjusted EBITDA improved to $1.6 million during the fourth quarter of 2022, which compared to -$5.1 million in the same period of 2021.

We were proud to have achieved positive operating cash flow of $5.2 million during the fourth quarter of 2022, which compared to -$3.2 million during the same period of 2021. Moving to 2022 financial results. Total revenue for 2022 were $71.4 million compared to $73.8 million in 2021. The decrease was primarily due to decrease in sales of certain terminal and the data-related products, partially offset by an increase in international and local data connectivity service. Revenue from service for 2022 were $46.2 million, an increase of 22.3% from $37.8 million for 2021.

Revenue from service as a percentage of total revenue was 64.7% during 2022, up from 21.2% during 2021. In 2022, revenue from international data connectivity service were $28.1 million, and the local data connectivity service were $7.4 million, increasing by 29.6% and 35.5% respectively year-over-year. This increase in revenue for data connectivity service was mainly attributable to the gradual recovery of international travel and the continuous development of our local data connectivity service centers. Overall gross margins improved to 45.5% in 2022 compared to 29.6% in 2021. Our service gross margin increased to 56% in 2022 compared to 43% in 2021.

The increase of service gross margin during 2022 was primarily attributable to a more favorable business mix, with a larger proportion of revenue coming from international data connectivity service, which tend to have higher gross margins. During 2022, we streamlined our business operations, which led to significant reduced operating expenses. Excluding share-based compensation, total operating expenses increased to $34.4 million or 48% of total revenue in 2022 compared to $47.1 million or 64% of total revenue in 2021. In 2022, we significantly narrowed net loss, which was $19.9 million compared to $46 million in 2021. Adjusted EBITDA narrowed to -$2.3 million during 2022 compared to -$22.6 million in 2021.

During 2022, our CapEx was $0.4 million compared to $0.9 million in 2021. For the full year 2022, we achieved positive operating cash flow of $4.4 million compared to -$21.7 million during 2021. Move on to balance sheet item. Our cash and cash equivalents and short-term deposits increased to $15.1 million at December 31st, 2022 compared to $8.1 million at December 31st, 2021. We're pleased to have strengthened the company's financial position over the course of 2022 and are well-positioned to continue growing our business in the near term. With that, operator, let's open it 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 telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, press star then two. Once again, that was star then one to ask a question, and at this time, we will pause momentarily to assemble the roster. Our first question will come from Theodore O'Neill of Litchfield Hills Research. Please go ahead.

Theodore O'Neill (CEO and Senior Analyst)

Thank you very much. My first question is about the gross profit. You're showing us improvement year-over-year and sequentially in gross profit margin, and I was wondering if you'd give us some insight into why that's improving so nicely here.

Yimeng Shi (CFO)

Yeah. Thank you, Theo. Yes, this image, I could give more colors on improvements, gross margins. Yeah, the generally is the improvements it came from a service mixture as we disclosure in this statement. We have a more international connectivity service in our total service portion. The international's connectivity service have higher gross margins than low-cost connectivity service. Also in our service mix, we have a significant portions of PaaS, SaaS revenue. This is the highest gross margin as well.

Also we have in the past years, and we have put offers on research and developments to control this data consumptions usage. Also we have put controls on commercial side and keep this commercials pricing on some stable levels. That's the, that's the whole years give us improving gross margins compared with the year 2021. The service gross margins is coming back to the history whole year's levels 2019. This the service gross margins, it's pick up to 59% overall in the whole years. We expect this trend for this higher gross margins for service.

We will keep this trend in this year of 2023, as we expect the revenue portions from international connectivity service will increase materially. We have this same trends compares with last year as well.

Theodore O'Neill (CEO and Senior Analyst)

Thank you. My next question is about the balance sheet. You're showing a year-over-year large decline in accounts receivable. Can you explain what's going on there?

Yimeng Shi (CFO)

Yeah. Yeah. That's correct. Yes. In 2022, we put significant efforts on cash collections from the account receivable from the current years, 2022 selling. Also we put efforts on the agents account receivables backward from the years 2021's savings.

Chaohui Chen (CEO)

There's account receivables. The balance account receivable decreasing significance 'cause we put quite a lot of efforts on cash collections from the customer side. This years, we will also keep this same efforts on savings and to collect cash quickly from the customer's side as well. I think we have a good customers pools from the Japanese market, from the U.S. market as well. This the cash collections cycles is very important for us to have a quick cash inflow to support our operations and the business growth. Thank you.

Operator (participant)

Thank you very much. The next question comes from Vivian Zhang of Diamond Research. Please go ahead.

Vivian Zhang (Equity Research Analyst)

Good morning. This is Vivian Zhang from Diamond Equity. Thanks for taking my questions, and congrats on achievement you made last year. My first question is as China lifted its zero-COVID policy and pandemic travel restrictions in December last year, it's expected that international travel will further recover and rebound as well. How do you think this will affect your company's business and revenue in 2023 and beyond?

Chaohui Chen (CEO)

Yeah. yeah. I'm Chaohui Chen, CEO of uCloudlink. Yeah. We can see the whole world including China, you, and, you know, to open the border. We can see a smaller rebound from the China festival, spring festival in to China, Chinese New Year. I think the fourth wave of rebound from the COVID-19, I think will be the Labor Day is in May first. This May first that we are have the fourth wave of rebounds from the COVID-19. The whole years we think in China because, you know, everything recovery needs some period.

Including the, you know, the, passport, you know, visa, everything need ready. We believe that the this year maybe in China only 40, around 40% recovery. Next year 2014, the, I think full recovery of the China will happen. This year around 40%. That's our forecast based on our based on this, and our year 2023 forecast is based on this assumption. We believe, maybe the things will be go more better. If the things go more better, and we will get more, you know, better, you know, you know, a result.

That's the from the China and Southeast Asia, like Japan and Korea, they are not open as early as like in Europe, in United States. I think this year major from the East Asia and the China will get at least 40%-50% recovery, and next year we are fully recovery. That's our expectation.

Vivian Zhang (Equity Research Analyst)

Okay. Thank you, Mr. Chen. My next question will be about the products. Are there any products the company plans to launch or updates in 2023? If so, can you briefly introduce them?

Chaohui Chen (CEO)

Yes. We have even last year, we faced a challenging years for our R&D team, heavy investment in the R&D side. You can see this years we will not only launch the 5G product that's leading in the industry. Currently, almost it's the only one product can roaming all the 5G network in the world. This will build our leading position for commercial business traveler. We believe that's the best connection experience, you know, for international market. That's one side. Another side, you know, we will in near term, we will in next month, we will launch a world smallest, you know, product. The smallest creative product, so we call Tekfi.

This will be announced in near term. That's another creative product. It's very. It's smaller than just a credit card. It's very. It's smallest in the world. That's another, you know, creative product. It's easy for carrying for the international and the local, you know, improvement for the network and roaming. Also, we have some other new product for mobile broadband and fixed broadband convergence product, and the 5G, and the CPE and a high-gain CPE. This will get another, you know, mobile network for fixed and mobile convergence. Also this years, we will launch, you know, one app, you know, marketplace, or 1.0 solution.

Marketplace our app for 1.0, app. This app will launch in near term also. We can meet the different requirement of the user for roaming, not only just for Cloud SIM, eSIM. Also Wi-Fi. We can meet almost various all kind of the customer need for traveler. We can attract more customers and provide a more, you know, attach more customers catalog and a segment. This will increase our customer requirement and also the our influence for the roaming solution. That's the another, you know, new product we will launch that's for software and hardware as well. Basically, also, so we have some other new product we're launch at the end of the year.

That's near term I can show to you in... for the year, product we'll launch in the year 2023. By the way, for IoT, we also. Yeah, IoT side, we have a lot of new product launch, like, you know, IP camera, like, you know, industry router, and also, more product embed into the like power supplyment, power, like, solar power system, et cetera. The more and more IoT SIMs product will embed our Cloud SIM solution, which can provide the better coverage and the reliable network connection. We, you know, save the cost and save the main cost and also launch cost and also the maintenance cost. That's our advantage. Also can enhance the reliability of the IoT networks.

That's the some, indeed, that's quite a lot of the, you know, the new solution, especially our marketplace, and then we have regained, you know, some software, you know, launch in these years, you know.

Vivian Zhang (Equity Research Analyst)

Okay. Got it. Thank you. Thank you for detailed information. Just make sure these products and hardware updates will be launched to global market, right? Not just some certain markets like Japan or USA or something, right?

Chaohui Chen (CEO)

Yeah. Those I think, yeah. By the way, Our technology will be more recognition by Chinese government, and also by more application like in Japan market. I think more and more user and partner, they re-recognition our technology for IoT, for this new product. We believe we can get, I think the, you know, more wider, you know, and the growth of year 2023.

Vivian Zhang (Equity Research Analyst)

Okay.

Chaohui Chen (CEO)

Uh, meaning the-

Vivian Zhang (Equity Research Analyst)

I see. Sorry. That helps.

Chaohui Chen (CEO)

Yeah.

Vivian Zhang (Equity Research Analyst)

Go ahead.

Chaohui Chen (CEO)

Give some more, yeah. You asked the question whether the new product will launch to the global market. Yes, it will launch to global market. But we will deliver to the Japanese, Japan's market, U.S. market as well. That's a target for the global market.

Vivian Zhang (Equity Research Analyst)

Okay. Okay. Thank you. That helps. That's all my questions. That's all. Thank you.

Operator (participant)

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 Officer)

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 APT Group. We look forward to speaking to you again on our next quarterly call. Thank you.

Chaohui Chen (CEO)

Thank you.

Operator (participant)

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