Ucloudlink Group Inc (UCL) 2022 Q3 法說會逐字稿

Hello and welcome to the UCLOUDLINK Group Inc. third-quarter 2022 earnings conference call. (Operator Instructions) 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.

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.ucloudlink.com as well as on our Newswire survey. 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 Brand President of Marketing and Sales.

Our CEO will begin with an overview of our company and business highlights, which will cover Section 1 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 Sections 2 and 3.

Before we proceed, please note that this call may contain forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Security 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 achievement 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 entity 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, change in market conditions, or otherwise, except as required by law.

Please also note that UCLOUDLINK earnings press release and this conference call include discussions of the unaudited GAAP financial information as well as 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.

Yes. Thank you, Jillian. Page 4 to page 12 have similar content as the earnings presentation of the second quarter of year 2022. We still encourage you to review in the third quarter of year 2022 earnings presentation uploaded to our Investor Relationship website with some basic updates. Hence, I will focus on our most recent developments in the third quarter.

Let's move to the page 13. uCloudlink 1.0 is our international data connectivity services business, which has had a strong track record of high gross margins and profitability with ongoing growth potential. During the third quarter of the year 2022, our 1.0 business revenues increased by 30.1% compared to the same period of year 2021. The revenue of our 1.0 business in our Japan and Southeast Asian market increased significantly, and in Mainland China market recovering slightly during the third quarter of year 2022, year over year. International travel distribution around the world continues to abate over time across our major international market 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 terminal for the 1.0 business has increased during the third quarter of year 2022 compared to third quarter of year 2021. Average daily active terminal now for the 1.0 business has increased by 25%, showcasing the accelerated recovery of the demand of the UCLOUDLINK 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 assess more than 300 global mobile network operators available of a 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 have become a new driver of revenue growth since 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 in the IoT area, our ability to improve network convergence and data connections, the cooperation with 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 had operators and business partners improve their data connectivity services and solve data connection programs through our PaaS and SaaS platform based on our patent technologies, including the CloudSIM and HyperConn technology solution.

As we shared in our latest quarter -- in our last quarter, we take pride into our ability to adapt our sales to the evolving market by introducing and upgrading innovative products to address various 2.0 business application scenarios.

Our 2.0 business revenue report 38.7% increase during the third quarter of year 2022 compared to the same period in prior years. Our customers are able to realize reduced operating costs and improve data connectivity experiences through this cutting-edge IoT solutions, and 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 ramping.

During the third quarter, we have extend the 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 grow 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 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 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 year 2022, and we successfully achieved a positive unadjust 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 USD18.2 million during the third quarter of the year 2022. And for the first quarter of year 2022, we expect we would further improve our total revenue to be between USD19 million and USD22 million, representing an increase of 8% to 25% compared to the same period of year 2021.

We expect these improvements will allow us to build a more solid financial and operational position to see better results in the future. We believe that connected to better connection, UCLOUDLINK is a significant driving source in the transformation of increasingly advanced information era.

We are committed to build a more connected future for our customers -- 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.

Thank you, Mr. Chen. Hello, everyone. I will quickly go over our business highlights for the quarter ended September 30, 2022.

Let us turn to page 17. Average daily active terminal 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 1.71 gigabyte in September 2022.

Let's us 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 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, and we will continue to expand to other markets such as Europe and Southeast Asia, et cetera.

During the third-quarter 2021, we had 3.7% of total revenue coming from Mainland China, 46.6% of total revenue coming from Japan, and 49.7% of total revenue coming from other countries in the regions.

Let's now turn to page 20. I will go through our financial highlights of the third quarter of 2022. Sales-related revenue as a percentage of total revenue was 69.2% during the third quarter 2022 compared with 34.2% (sic - see news release, "54.2%") 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 compared to 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 from service and sales products. Our total revenue decreased by 5.7% from USD19.3 million in the third quarter of 2021 to USD18.2 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 USD12.6 million, representing an increase of 20.5% from USD10.5 million from the same period of 2021. This increase was primarily attributable to an 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. And our overall gross margins was 47.7% in the third quarter of 2022, increased from 28.3% during the same period 2021. The increase of our service gross margins during the third quarter at 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.

Let us turn to page 24. Operating cash flow maintained positive for the second consecutive quarter during third quarter of 2022 and was USD1.2 million compared to a negative USD5.7 million during the same period of 2021. This is primarily a result of our ongoing efforts to improve our margin profile and the control operating expenses.

Our cash and cash equivalents and short-term deposits were USD12.5 million as at September 30, 2022. Our CapEx was USD0.1 million compared to USD0.3 million in the same period 2021.

Let us move to page 25. Net loss during the third quarter of 2022 was USD4.6 million compared to USD7.0 million during the third quarter of 2021.

Adjusted EBITDA non-GAAP was positive for USD0.9 million during the third quarter of 2022 compared to negative USD5.4 million during the third quarter of 2021. We successfully achieved a positive adjusted net income non-GAAP and adjusted EBITDA non-GAAP for the first time since global outbreak of COVID-19 pandemic in the second quarter of 2020. As mentioned above, the company is working towards improving its bottom line results and financial position.

In October, we announced the early redemption of a convertible debenture due to our increasing competence in the improved financial business. 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'll start our Q&A session.

(Operator Instructions)

Vivian Zhang, Diamond Equity Research.

Good morning. Congrats on last quarter. My -- so 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?

Yes. Yimeng Shi will be answering the questions. Yes, the second quarter, we maintained the positive operating cash flow following the second quarter of 2022. The main reason that came from the two. First, our margin profile has been improving quarter over quarter. As we illustrate on our presentations, our service gross margins and overall growth -- overall gross margins has reached the highest levels. So that contributed to our gross profit amount increased significantly.

And the second point is our -- we have maintained control of our operations process. We streamlined -- business operations. And as we demonstrate, our operating expenses has been decreased significantly compared to the same periods last year. So that's the two main contribution to our second quarter's positive cash flow. And we expect this trend, the positive cash -- operating cash flow, will be achieved in the fourth quarter of this year. So we believe our financial position has been improving and support our growth in the future.

Yes, by the way, our international business recovery. So this is a high-margin business. Also had to get more high-margin business.

Okay, got it. So can you share with us what matters have you taken to control costs and achieve positive adjusted net income and EBITDA?

Yes. The similar reasons as our positive operating cash flow. The gross margin -- overall gross margin improved a lot. And our operating expenses have been decreased at the same time as well. So we combine combinations together; we will achieve a positive adjusted net income and positive adjusted EBITDA. So we expect this improvement will be carried on in the fourth quarter and the next year as well. So the company's current situation will be improving on this basis.

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

Yes. This as we -- in the release, we -- the main decrease in amount came from the headcount-related cost. That's the numbers as our headcount has been reduced compared with the same period last year. So we report that the headcount numbers in the presentations is 300 around. So compared with last year's numbered headcount has been -- but our efficiency, our efficiencies operations have been improved, and this number of headcounts to support or to achieve the year-end outlook and also achieve our growth in the next year as well.

Okay. Got it. So 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. So can you share with us the growth of the North American market? And how -- what are the drivers for the growth there?

Yes. So I am Chen, speaking. So North America is -- you can see 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 US recoveries from COVID-19. So the requirement for the international traveler become more and more popular, that's one reason. And the second reason is the US market, the coverage of network is not as good as in China and Asia. So people need a better coverage and less the traffic jams in local network. So that's increased. Especially for 5G, the coverage improved.

So we launched the world's first 5G solution, the [main 5G] solution in United States, that's popular in this market. And the third, the local market, including IoT and including the local requirement for the better coverage. So it's getting more and more -- I think, more and more industry and people need better coverage to providing a better service. So these are three key reasons that -- because our product can provide the best coverage compared to other products. So we win more and more market share in this market.

Okay. Got it. So can you share with us like who are the main competitors of you in the North American market?

Yes, there are -- in different areas, we have different competitors. There are some competitors like Sky Long; they are similar technology. But 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 products. 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 our case.

The other case is we -- our product is a best-seller in the -- for the cloud sim technology in the Amazon market. You can see our market share there. And also our customers understand our quality product patent is in a leading position in this market. This help us quickly exploring the US market and the market share increased very quickly.

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

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Jillian Zeng for any closing remarks.

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

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