uCloudlink Group - Q4 2023

Transcript

Operator (participant)

Good day and welcome to the uCloudlink Group Inc. Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. 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. Please go ahead.

Jillian Zeng (Company Representative)

Hello everyone, and thank you for joining us on uCloudlink's Fourth Quarter and Full Year 2023 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, 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 fourth quarter and full year 2023. They will all be able to take your questions in the Q&A section 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 make 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 statement, risk factors, and details of the company's filings with the SEC. The company does not feel any obligation to revise or update any forward-looking statements as a result of new information, future events, change 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 non-audited GAAP financial information and non-audited 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 (Co-Founder, Director, and CEO)

Thank you, Jillian, and good morning, everyone. Thank you for joining us. We appreciate everyone taking time out of your busy days. We are very pleased to report another strong set of results in year 2023, highlighted by a 19.8% increase in full year's revenues to $85.6 million. 2023 was a milestone in the turnaround of our business following the COVID-19 pandemic, with operating cash inflow of $6.5 million and net income of $2.8 million. Our 1.0 International Data Connectivity Services business continued to recover in year 2023. In our major markets, China and Japan, we are seeing the early signs of a recovery in outbound tourism and business travel following the COVID-19 pandemic, with more Chinese tourists beginning to use our Roamingman brand services again and the recovery in Japan gaining momentum.

Our market share in these major markets is growing, which will create significant growth opportunities for us going forward, with one of the most extensive 5G global networks in the world that cover 55 countries and regions. Our competitive local full-speed 5G global solutions not only offer extensive coverage but also significantly enhance the user experience, which further expands our user base and cements our leading positions in the global market. While working to turnaround our business over the past years, we leverage our existing research and development resources and cutting-edge technologies to explore business opportunities beyond portable Wi-Fi terminals and expand the array of comprehensive data connectivity solutions to satisfy a wide range of users' needs.

In addition to significantly enhancing the travel experience by catering to the diverse data connectivity needs of various users, we will also offer more intelligent and convenient live applications like item tracking, pet management, and emergency communication, among others, through our GlocalMe Life Solution business. We believe that these solutions will expand our market reach and help us establish a broader market presence. Our better connection empower better life mission is leading us to extend our business beyond the travel sectors to various aspects of daily life, thereby generating long-term sustainable growth. To drive this transformation, we plan to reorganize ourselves into four distinct product lines in year 2024: GlocalMe Mobile Fixed Broadband, the first; second, GlocalMe SIM; the third, Internet of Things (IoT); and the final, GlocalMe Life Solutions.

We believe this business reorganization will allow us to operate in a more agile fashion, take advantage of emerging opportunities, and enable us to engage with a broader user base with a robust suite of our products and solutions coming in the future. So please allow me to tell you more about what's happening and what's to come at uCloudlink. Let me go into a little more detail in the new array of product lines we have planned for the future. First, we will continue to strengthen the foundation of our business, GlocalMe Mobile and Fixed Broadband, with an expanding offering of innovative CloudSIM technology, HyperConn solutions, and additional value-added services that improve the user experience. We believe that we are uniquely positioned to expand our share in the roaming market.

In addition, we plan to introduce a commercial-grade dual-band customer-premise equipment (CPE), which supports local fixed networks as well as multiple mobile networks from all major operators. It will be able to maintain connectivity even when fiber optic lines fail or are disrupted. Our 5G CPE will be a large-scale and commercial, and will unlock additional opportunities in the mobile fixed broadband space. Second, GlocalMe SIM solutions, including our over-the-air OTA SIM and eSIM solutions, will evolve into the innovative All-SIM solution, which will allow us to engage with a broader end-user base beyond those in the portable Wi-Fi terminal market. Our pioneer All-SIM solution is promised to break out of cross-carrier restrictions and empower every smartphone.

Third, our GlocalMe Life Solutions business has an exciting slate of our product announcements planned in the future, which will bring seamless connectivity into various high-frequency daily life application scenarios, as I mentioned earlier, such as pet management, item tracking, as well as emergency communication. Last but not least, we will also integrate these CloudSIM technology and HyperConn solutions into our IoT business, leveraging both proprietary and third-party smart modules compatible with mainstream chipset platforms. Our IoT business will empower terminals and third-party devices, allowing them to intelligently select and dynamically switch between multiple local carrier networks worldwide. This diverse array of solutions, we believe, will help expand our business beyond portable Wi-Fi terminals and drive growth in the future because of the changes we have been making. Our customers will enjoy more intelligent and convenient life through our high-quality data connections for a range of everyday scenarios.

Finally, I would like to review our guidance for the fourth quarter and full year of 2024. We are optimistic about our future growth prospects following this business reorganization. However, we also recognize that we are only just beginning this transformative journey, and these initiatives will take time to mature. For the fourth quarter of 2024, we expect total revenues to be between $17.5 million and $18.5 million, representing a decrease of 2.8% to an increase of 2.8% compared to the same period of 2023. For 2024, we expect total revenues to be between $95 million and $112 million, representing an increase of 11%-30% from 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 highlights for the fourth quarter and full years of 2023. Average daily active terminals is an important operating metric for us as it measures customer usage trends over each period, which is reflective of our business performance. In the fourth quarter of 2023, average daily active terminals were 316,207, of which 10,075 owned by the company and 306,132 owned by our business partners, representing an increase of 6.2% from 297,884 in the fourth quarter of 2022. During the fourth quarter of 2023, 47% of the daily active terminals were from uCloudlink 2.0 Local Data Connectivity Services, and 53% of daily active terminals were from uCloudlink 1.0 international data connectivity services. Average daily data usage per terminal was 1.55 GB in December 2023.

Total revenue for the fourth quarter of 2023 was $21.7 million, representing an increase of 10.8% from $19.6 million in the same period of 2022. Revenue from service was $14.9 million, representing an increase of 19.1% from $12.5 million in the same period of 2022. Revenue from service as a percentage to the revenue was 68.7% during the fourth quarter of 2023, up from 63.9% during the same period of 2022. During the fourth quarter of 2023, as a percentage of total revenue, Japan contributed 43.1%, North America contributed 24.3%, Mainland China contributed 16.5%, and other countries and regions contributed the remaining 16.1% compared to 43.7%, 33.9%, 3%, and 90.4% respectively for the same period for 2022.

Overall gross margin improved to 52% in the fourth quarter of 2023 from 51.3% for the same period of 2022, while gross margins on service increased to 60.1% in the fourth quarter from 59.4% for the same period of 2022. Excluding share-based compensation, total operating expenses increased to $11.6 million, or 53% of total revenue in the fourth quarter of 2023, compared to $10.4 million, or 53% of total revenue in the same period in 2022. Net loss was $1.8 million in the fourth quarter of 2023 compared to a net loss of $1.1 million in the same period of 2022. Adjusted EBITDA was $1.5 million in the fourth quarter of 2023 compared to $1.6 million for the same period of 2022.

Moving to 2023 full year's financial results, total revenue for 2023 rose to $85.6 million from $71.4 million in 2022, driven primarily by an increase in revenue from data connectivity services. Revenue from data connectivity services was $46.7 million, an increase of 31.7% from $35.5 million in 2022. Within data connectivity services, revenue from international data connectivity services rose to $37.9 million from $28.1 million in 2022, as the recovery in international travel accelerated. Overall gross margin improved to 49% in 2023 from 45.5% in 2022, and our gross margins on service increasing to 58.5% from 56%. This increase in gross margin on service in 2023 was primarily attributable to a more favorable business mix, with a larger proportion of revenue coming from international data connectivity services, which tend to have higher margins.

For the full year 2023, excluding share-based compensation, total operating expenses decreased to $34.6 million, or 40% of total revenue in 2023, compared to $34.4 million, or 48% of total revenue in 2022. We achieved a net income of $2.8 million in 2023, improving from a net loss of $19.9 million in 2022. Adjusted EBITDA was $9.8 million in 2023, compared to a loss of $2.3 million in 2022, according to the same measurement. For the full year 2023, our capital expenditure was $2.1 million, compared to $0.4 million in 2022. For the full year 2023, we achieved positive operating cash flow of $6.5 million, up from $4.4 million in 2022.

Moving on to our balance sheet items, our cash and cash equivalent increased to $23.4 million as of December 31st, 2023, compared to $20.3 million as of September 30, 2023. We are pleased to have strengthened the company's financial position over the course of the years and are well positioned to continue growing our business. 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 touchscreen 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 today comes from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Theodore O'Neill (CEO and Senior Equity Analyst)

Thank you very much. I have two questions this morning. My first question is about revenues from data connectivity services of $11.8 million in the quarter. That's down from $13.8 million in the third quarter. I was wondering if you could give us some insight into that and if it was driven by any particular geographic region that was down sequentially, more so than others.

Yimeng Shi (CFO)

Hi, Theo. Thanks for your question regarding this data connectivity service for this quarterly change. You mentioned the two quarters, the third quarter compared with the fourth quarter. Yes, as you know in our disclosures, the international roaming service is a main driven for our growth on service. And the seasonal reasons, the third quarter is peak time, is a summer vacation. So that's a peak time for the roaming business. And in the fourth, similarly, is a little bit down for this roaming service. That's a pattern of the seasonal change business.

Theodore O'Neill (CEO and Senior Equity Analyst)

Is it across all geographies, or is it any particular geography?

Yimeng Shi (CFO)

No, that's overall seasonal change. In the fourth quarter of the years, it's only a short period like Christmas holidays. But in the third quarter, it's a long summer vacations. So that's the overall seasonal change, not particularly to some particular regions.

Theodore O'Neill (CEO and Senior Equity Analyst)

Okay. Understood. Thank you very much. My other question is about G&A expenses of $6 million in the quarter. I noticed also last year, the G&A expenses rise sequentially from third quarter to the fourth quarter. This year, the same thing. It went from $3.8 million in the third quarter to $6 million in the fourth quarter. I was wondering, what drives that change sequentially from 3Q to 4Q in G&A?

Yimeng Shi (CFO)

Yeah. From our understanding, that's a good incentive plan for our employees. We have, as we disclosed, our performance turnaround positions in terms of the revenue growth and also a net income tend to be positive compared with a huge loss in the year 2022. The management decided to pay a significant increase for annual bonus for the whole company's employees. That's specifically driven by a pay rise in terms of annual bonus. I think that's very good motivation to our employees. We have tight controls on the headcount numbers in the course of years' growth. This year, our whole company's employees are well motivated to support our growth for this year.

Theodore O'Neill (CEO and Senior Equity Analyst)

Thank you very much. That explains it to me. Thank you very much.

Operator (participant)

The next question comes from Vivian Zeng with Diamond Equity Research. Please go ahead.

Vivian Zhang (Analyst)

Hello. Hello. This is Vivian Zeng with Diamond Equity. My first question would also be about the fourth quarter revenue, which didn't meet your guidance of $22 million-$26 million. So we'd like to know the reason for not meeting these expectations for the fourth quarter?

Yimeng Shi (CFO)

This is Yimeng Shi. I answered your questions first, and then Mr. Chen will add some color on this fourth quarter's revenues. A little bit lower than this guidance. We disclosed this guidance as $22 million as the bottoms. Yeah, just a small, we achieved $21.7 million in the fourth quarter of 2023, just a little bit lower than our guidance. It's still on our business patterns. We just have some hardware orders. We defer some hardware orders to later periods because we have some commercial terms that need to be agreed by the customers before we deliver this hardware to customers. So our business, if we're taking into consideration this hardware's deliveries in the normal course, we will meet this guidance. Yeah. So that's technically a change in the final week of the month, December. Yeah.

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

By the way, we have another reason to cost less than our expectation. That's because our new product is a little bit delayed just for our R&D reason. So that's another reason that caused a little bit less than our expectation.

Vivian Zhang (Analyst)

Okay. Understand. So the next question is that can you share more information about your newly announced GlocalMe Life solution business? Because like you mentioned, any products or services can be launched or expected to boost revenue this year in 2024.

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

Yes. So in the traditional, we are majorly before year 2023, we are majorly relying on our portable Wi-Fi to create the major revenue. And from the last year's third quarter, we started to launch our new product such as OTA SIM card, such as our GlocalMe Life product. So for the smaller business, early business trial. So this year, we will officially launch our GlocalMe Life product. That means we create people who need a better connection. Because better connection, one aspect, we can create revenue from the data. Another aspect, we can create a better life for people. For example, if we get the best network, when the old people are falling down, their SOS message can send to the rescue center. Normally, it's easy to fall down in the bathroom and the kitchen. Most of these two areas, signal is very poor.

Our product can provide not only the local Wi-Fi connection, home Wi-Fi connection, but also cross-carrier all the signal. Then can help send out this critical SOS message and then can enable these old people to get help, get saved. Another similar product I mentioned is about a tracker. Our tracker can find something better than the normal tracker and the AirTag counterpart. Because with the GPS scenario, our tracker can send the GPS location data via the mobile network. Because in a rural area, in the corner of the building, normally, coverage is very poor. So mobile network, of course, can help this message send out than just single carrier network. That's why we call our new generation tracker with the better connection can find out something that the traditional tracker and the AirTag counterpart. That's one reason.

Another second reason is about without GPS scenario, our multi-carrier tracking location capability while a carrier base station. We have multi-carrier base station. Normally, one carrier, three base stations, you can locate your items. But with multi-carrier, we can provide maybe 20, 30, no, 20 base stations so we can get more high-accuracy location data. And also, we have multi-network can send out this location data. And that's why our tracker can help users find out more possibility for these items. And final one, our product has radar technology for the last 100 meters. It's extremely difficult for people who find out the items in the last 100 meters. But with our solution, and you can rely on this 100-active radar to find out where is the device. That's why we call we are the new generation creation tracker, SuperTrack, which can find the other tracker and AirTag.

A similar concept is about healthy emergency communication, I just mentioned before. So this scenario, one by one, we will launch the product in the second quarter. And the fourth quarter is for pilot. And second quarter for volume business, for volume launch. So I think in the following quarter, we believe this new product will create or generate more revenue for us. As you understand, we have all SIM solutions, including OTA SIM and eSIM. These also, we generate that's more easy selling than our traditional portable Wi-Fi can access more customers for travel worldwide. So I believe all these new products, we will create in the following quarter more customer base and more revenue base for our business. Thank you.

Vivian Zhang (Analyst)

Okay. I get it. Thank you. Thank you so much. Those are my questions.

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 (Company Representative)

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 speak to our investor relations firm, Christensen Advisory. We look forward to speaking to you again on our next quarterly call. Thank you. Thank you. Bye-bye.

Operator (participant)

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