Ucloudlink Group Inc (UCL) 2022 Q4 法說會逐字稿

Good morning, and welcome to the uCloudlink Group Inc. fourth-quarter and full-year 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 of Investor Relations.

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 [with] newswire survey. I will give a brief introduction to our uCloudlink management team. Zhiping Peng is our Co-Founder and the 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 then discuss company's operation highlights and the 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 expectation 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 the 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, changes 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 unaudited GAAP financial information as well as unaudited non-GAAP 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.

Thank you, Jillian, and good morning, everyone. Thank you for joining us on our year-end 2022 earnings call today. We appreciate everyone's time.

Year 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 USD4.4 million for the year end December 31, 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 higher margin lines of business, and the one which we believe will continue to be a key growth driver for the company. During the fourth quarter of year 2022, uCloudlink 1.0 business revenues increased 48.2% year over year to USD7.7 million. For 2022, uCloudlink 1.0 business revenues increased 29.6% year over year to USD28.1 million.

This improvement is a reflection of international traveler recovery 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 year 2022. Average daily active terminal 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 a 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 year 2020. Over the past two years, we have continued to strengthen our presence in markets like Japan, North America, and Southeast Asia where we have developed -- 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 patent technology, including cloud SIM and HyperConn technology solutions. Our uCloudlink 2.0 business reports USD7.4 million in revenues, up 55.5% in year 2022 from USD4.7 million in year 2021.

On the information -- on the Internet of Things, IoT side, our customers were able to realize reduced operating costs and improved data connectivity experience through these cutting edge IoT solutions. And we continue to explore opportunities where we can broaden the applications of our technologies for partners with IoT needs, powering applications scenario like a WiFi 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 the year 2023, we have observed an accelerated recovery in international travel. The United Nations World Travel 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'll] act quickly to [interpret] providers' data solutions coverage as many of our partner airports, airlines, and travel agents, allowing us to meet the recovering demand for uCloudlink 1.0 Roamingman business in China, Malaysia and Singapore.

We believe the improving macro environment represent a greater upside for uCloudlink 1.0 business in year 2023. And we are continue [extending] our leading position as a 5G roaming solution provider and launch uCloudlink 1.0 product and solutions such as the eSIM solutions to satisfy the various needs of our customers and users in [marquee] industries.

For our 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 [garnered] more industry recognition in China, which is expected to accelerate uCloudlink 2.0 business growth.

In January year 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 the 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 augmented 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 a long-term development of our PaaS and SaaS platform ecosystem, which we believe is key to the success of our mobile data sharing marketplace.

With that, I would like to touch on uCloudlink's 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 end users' device to connect to any available network anytime and anywhere, utilizing the GlocalMe app.

The GlocalMe app is designed to support various application scenarios without limitation of the device, including top up and go GlocalMe terminals, active and go eSIM, GlocalMe data application-only solutions, GlocalMe SIM, GlocalMe inside the third-party device, mobile WiFi 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 technologies. We are committed to continuous development of innovative solutions and plan to expand our cloud SIM and HyperConn technology solutions to various application scenarios, including media, video conferences, outdoor live broadcasting, et cetera.

Based on these innovative cloud SIM and HyperConn technology solutions, we expect to launch more innovative products covering the needs of a diverse set of enterprise and individual customers in year 2023, one of which is the one set 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 full year 2023. For 2023, we expect total revenues of between USD85 million and USD100 million, representing an increase of 19% to 40.1% compared to year 2022. We expect to build a more solid financial and operational position to feel better results in the future.

We are pleased with our achievements in 2022. And 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. And I 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.

Thank you, Mr. Chen. Hello, everyone. I will go over our operational and financial highlights for the fourth quarter and the full year of 2022. Average daily active terminal, DAT, is an important operating metric for uCloudlink as it measures the trend, the customer usage trends over each of the periods, which is reflective of [growing] business environments.

In the fourth quarter of 2022, average daily active terminal were 297,884 of which 2,299 owned by the company and 295,585 owned by our business partners, up 12.2% from 265,595 in the fourth quarter of 2021. Our uCloudlink 2.0 service accounts for around 62.1% of the total DAT during the fourth quarter of 2022. Average daily data usage per terminal was 1.68 gigabytes in December 2022.

Total revenue for the fourth quarter of 2022 were USD19.6 million, representing an increase of 11.6% from USD17.6 million in the same period of 2021. Revenue from service in the fourth quarter of 2022 were USD12.5 million, an increase of 30.3% from USD9.6 million in the same period of 2021. Revenues from service as percentage 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 countries 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. And 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 USD10.4 million or 33% of total revenue in the fourth quarter of 2022 compared to USD10.9 million or 62% 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 USD1.1 million in the fourth quarter of 2022 compared to a net loss of USD15.5 million in the same period of 2021.

Similarly, adjusted EBITDA improved to USD1.6 million during the fourth quarter of 2022, which compared to negative USD5.1 million in the same period of 2021. We were proud to have achieved positive operating cash flow of USD5.2 million during the fourth quarter of 2022, which compared to negative USD3.2 million during the same period of 2021.

Moving to 2022 financial results. Total result -- total revenue for 2022 were USD71.4 million compared to USD73.8 million in 2021. The decrease was primarily due to decreased sales of certain terminals and the data related products, partially offset by an increase in international and local data connectivity service. Revenue from service for 2022 were USD46.2 million, an increase of 22.3% from EUR37.8 million for 2021. Revenue from service as a percentage of total revenue was 64.7% during 2022, up from 31.2% during 2021.

In 2022, revenue from national data connectivity service were USD28.1 million, and a local data connectivity service were USD7.4 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 continued development of our local data connectivity service center.

Overall gross margins improved to 45.5% in 2022 compared to 29.6% in 2021. And our service gross margin increased to 56% in 2022 compared to 43% in 2021. The increase in our 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 decreased to USD34.4 million or 48% of total revenue in 2022 compared to USD47.1 million or 64% of total revenue in 2021.

In 2022, we significantly narrowed this loss, which was USD19.9 million, compared to USD46 million in 2021. Adjusted EBITDA narrowed to negative USD2.3 million here in 2022 compared to last year, USD22.6 million in 2021. During 2022, our CapEx was USD0.4 million compared to USD0.9 million in 2021. For the full year '22, we achieved positive operating cash flow of USD4.4 million compared to negative USD21.7 during 2021.

Moving on to balance sheet items. Our cash and cash equivalents and short-term deposits increased to USD15.1 million at December 31, 2022, compared to USD8.1 million at December 31, 2021. We are 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 Instructions) Theodore O'Neill, Litchfield Hills Research.

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

Thanks, Theo. Yes, this is Yimeng Shi. I could give more color on improvements of gross profit -- gross margins.

Generally, the improvements came from service mixture as we disclosed in the statements, and we have a more international connectivity service in our total service portion and international connectivity service of a higher gross margins than low-cost connectivity service. And also, in our service mix, we have significant portions of PaaS/SaaS revenue. So this is the highest gross margin as well.

So there's -- and also, we have in the past years -- and we have put offers on research and development to control this data consumptions usage. And also, we have control -- put the controls on commercial site and keep this commercial pricing on some stable [levels].

So that's the whole year give us improving gross margins compared with the year 2021. And the service gross margin is coming back to the history [recall] years levels 2019. And the service growth margin is pickup to a 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 portion from international connectivity service will increase materially. And we have this same trends compared with the last year as well.

Thank you. And 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?

Yeah, that's correct, yes. In 2022, we put significant efforts on cash collections from accounts receivable from the current year's 2022 selling. And also, we put efforts on the agents' account receivables backward from the year 2021 sellings.

So there's account receivables. The balance of account receivable decreasing significant because we put -- apply a lot of effort on cash collections from the customer side. So this year, we will keep this same effort on sellings and to collect cash quickly from the customers' side as well.

And I think we have a good customers [pools] from the Japanese market, from the US market as well. So there's -- 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.

Thank you very much.

Vivian Zhang, Diamond Research.

Good morning. This is Vivian Zhang from Diamond Equity. Thanks for taking my questions, and congrats on achievements you made last year.

So 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, so how do you think this will affect your company's business and your revenue in 2023 and beyond?

Yes. I'm Chaohui Chen, CEO of uCloudlink. So yeah. So we can see the whole world including China to open the border. So we can see a smaller rebound from the China spring festival, Chinese New Year.

But I think the fourth wave of rebound of the -- from the uCloud -- from COVID-19, I think will be the Labor Day in May 1. This May 1, we will have another fourth wave of rebounds from COVID-19.

So the whole years we've been in China because everything recovery needs some period. So including the passport, visa, everything ready.

We believe this year, maybe in China, only around 40% recovery. And the next year, year [2014], I think full recovery that in China will happen. So this year around 40%. So that is our forecast based on our -- based on this, and our year 2023 forecast is based on these assumptions.

And we believe maybe that things will become more back better. So if the things come more back better, and we will get more better result. So that's from the China and Southeast Asia.

Like the Japan and Korea, they are not open as early as like in Europe, in the United States. But I think this year, major from East Asia and the China will get at least 40% to 50% recovery. And this year, we're full recovery, that's our expectation.

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

Yes. So we have -- even last year, we faced a challenging years. For our R&D this year, we have an investment in R&D side.

So you can see this years we were not only launched the 5G product that's leading in industry. Currently, almost it's the only one product can roam all 5G network in the world. This will build our leading position for commercial business traveler. So we believe that's the best connection experience for international market. That's one side.

Another side. In near term, in next months we will launch a [more small of this product], the smallest creative product, so we call it [typoplack]. So this will be around in near term.

So that's another creative product. It's very -- it's smaller than just a credit card. So it's very -- it's smallest in the world. So that's another creative product: easy for carrying for the international and the local improvement for the network and roaming.

Also, we had some other new product for mobile broadband and fixed broadband convergence product and the 5G and the CPE and the high [cad] CPE. These will get another more reliable network for fixed and mobile convergence.

And also, this year, we will launch one app marketplace for 1.0 solution -- marketplace for our app for 1.0 app. And this app, we will launch in near term ourselves, then we can meet the different requirement of the user for roaming, not only just for cloud SIM, eSIM (inaudible) so we can meet almost various, all kind of the customer need for travel. So then we can attract more customers and provide then more -- attach more customers, catalog, and segment. So this will increase our customer appointments and also our influence for the roaming solutions.

So that's another new product we will launch. That's for software and hardware as well. So basically, also -- so we have some other new products we'll launch at the end of the year. So that's the near term I can show to you for the year -- product we will launch in the year 2023.

Yeah. By the way, so for the IoT, we also -- yeah, IoT side, we have a lot of new products launched like IP camera, like industry motor, and also more product embed into the like a power supply, like solar power systems, et cetera. Then more and more IoT sales product we embed our Cloud SIM solution, which can provide the better coverage and reliable network connection.

And we save the cost and the settlement costs and also launch costs and also the maintenance costs. That's our advantage. And also, it can enhance the reliability of the IoT network.

So that's some -- there's quite a lot of the new solutions, especially our marketplace, and we've gained some software launch in these years.

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

Yeah. No, I think, yeah. By the way, we will -- our technology we have been more recognition by Chinese government.

And also, by our more application like in Japan market, I think more and more user and partner recognize our technology for IoT, for these new products, we believe we can get, I think, more wider on the growth of year 2023.

(multiple speakers) Yeah, you asked the question whether the new product will launch to the global market. Yes. It will (inaudible) launch to global markets. But we will deliver to the Japanese -- Japan's market and US market as well. So that's the target for the global market.

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

That's all, thank you.

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

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, The Equity Group. We'll look forward to speaking to you again on our next quarterly call. Thank you.

Thank you.

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