Ucloudlink Group Inc (UCL) 2023 Q2 法說會逐字稿

Good day, and welcome to the uCloudlink Group Inc., second-quarter 2023 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. Please go ahead.

Thanks, everyone, for joining us on our second-quarter 2023 earnings call today. The earnings release is now available on our IR website at ir.ucloudlink.com and via newswire services.

I will give a brief introduction to our uCloudlink management team. Mr. Zhiping Peng is our Co-Founder and Chairman of Board of Directors; Mr. Chaohui Chen is our Co-Founder, Director, and Chief Executive Officer; Mr. Yimeng Shi is our Chief Financial Officer.

Mr. Chaohui Chen, our Co-Founder and CEO, will begin with an overview of the company's recent business highlights, which will cover the earnings presentation posted on our IR website. Mr. Yimeng Shi, our CFO, will then discuss company's operational 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 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, 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 and 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.

Thank you, Jillian. And good morning, everyone. Thank you for joining us on our second-quarter year 2023 earnings call today. We appreciate everyone's time.

We were pleased to have achieved positive cash flow from operations for a fifth consecutive quarter. During the quarter, we reported strong top-line growth with total revenues of USD22 million, a 21.9% increase from the prior-year period, and the average daily active terminals continues to increase and once again reached a record high over 310,000.

During the second quarter of year 2023, revenues from uCloudlink 1.0 international data connectivity services business, that we call uCloudlink 1.0 business, increased by 32.5% year over year to USD9 million, and average daily active terminals from uCloudlink 1.0 business increased by 57.7% year over year, primarily as a result of the recovery in international travel, while outbound travel from China remained somewhat limited in the first half of the year 2023.

Chinese tourists utilizing Roaming Man brand services still have contributed an increasingly configurable amount to our international data connectivity services. Our unique 5G portable Wi-Fi terminals and the various data traffic packages from 4G to 5G are widely recognized by the market for the ability to elevate the user experience across a broader audience, which will enable us to maintain our leading positions in the global roaming market.

I'm pleased to share a few recent developments in our 1.0 business. In July, year 2023, we launched the GlocalMe SIM card. This SIM card is backed by our patent cloud SIM technology, which allows our customers to freely achieve and use multiple global data plans as needed. As of launch, this GlocalMe SIM cover 10 major destination countries, including Japan, the United States, Australia, and we expect to gradually expand its availability to additional countries and regions. In addition, we are launching pilot sales of our GPS-tracking-enabled roaming portable Wi-Fi terminals that we believe will be the smallest one in the world.

The innovative product range cover portable Wi-Fi, GPS-tracking-enabled roaming terminals, and the GlocalMe SIM card, add to our ever-expanding uCloudlink 1.0 business portfolio of offerings, through which we have global users that achieved a leading zero roaming experience in various application scenarios to certify their cross-border data demands, driving comprehensive competitive advantages that enhance our business performance.

We remain optimistic about the prospects of uCloudlink 1.0 business and believe that this higher-margin business will continue to serve as a key growth driver for the future. uCloudlink 2.0 local connectivity services business call, we uCloudlink 2.0 business, maintained continuous development, which report USD2.2 million in revenue, up by 23.1% from USD1.8 million in the second quarter of the year 2002 (sic - 2022).

During this quarter, our upgraded Customer Premises Equipment, CPE, was tested commercially. This product enables a seamless transition between fixed and mobile network, serving as a substitute for traditional fixed-line broadband that's suitable for home and office Internet connection use. We are confident that the upgraded CPE will allow us to further gain market share in the fixed broadband, we call FBB, market.

What I discussed just now outlines our data connectivity services business. I would like to highlight uCloudlink's PaaS and SaaS solutions, which is a line of business where we see great potential. On the IoT side, uCloudlink's IoT module will begin to be commercially embedded into the devices of a major mobile network operator in Japan within year 2023, making a significant expansion into IoT application scenarios.

Adding to the embedded IoT modules, the GPS-tracking-enabled roaming portable Wi-Fi terminals and upgraded CPE, this offering will generate recurring PaaS and SaaS services revenues apart from data connectivity services revenue and sales of products.

We look forward to applying our PaaS and SaaS solutions to provide additional services, including customer management services, emergency and security communication services, and the GPS tracking services, among the others, expanding our user base and application scenario and contributing to the growth of our revenues.

During the quarter, we continue to prepare for the full initiation of our one-stop comprehensive marketplace, APP, a centralized platform application that allows users to access our full portfolio of services. We believe that we are approaching the launch of one-step marketplace, APP, which will enable us to attract more users and customers beyond the users of portable Wi-Fi step by step. We remain confident in our team's capabilities to launch the APP in the near term.

In conclusion, we were pleased with the progress we have made in our growth initiatives as well as the improved financial results we have achieved in the first half of the year. We are pleased to be at the forefront of the innovation and expect to continue expanding our portfolio of offerings based on our innovative cloud SIM technology and the HyperConn solutions, which demonstrates our strong research and development capability, laying a solid foundation for future growth.

For the third quarter of year 2023, uCloudlink expects total revenues to be between USD23.5 million to USD24.5 million, representing an increase of 29.1% to 34.6% compared to the same period of year 2022. We will continue playing a significant part in integrating high-quality data connectivity experience into various life scenarios, and we believe that our solutions truly enable our customers and users to live a more convenient and intelligent life from connected to better connection.

I will now turn the call over to our CFO, Mr. Yimeng Shi.

Thank you, Mr. Chen. Hello, everyone. I will go over our operational and financial highlights for the second quarter of 2023.

Average daily active terminal, DAT, measure the trend of customer usage over the period, reflecting our ongoing business performance. In the second quarter of 2023, average daily active terminals were 318,778, at which 7,386 owned by the company and 311,392 owned by our business partners, up by 9% from 292,432 in the second quarter of 2022.

The average DAT for our uCloudlink 1.0 and uCloudlink 2.0 businesses account for around 46.4% and 53.6% of total DAT, respectively, during the second quarter of 2023. Average daily data usage per terminal was 1.59 gigabytes in June 2023.

Total revenues for the second quarter of 2023 were USD22 million, representing an increase of 21.9% from USD18 million in the same period of 2022. Revenues from service were USD14.1 million, an increase of 25.2% from USD11.2 million in the same period of 2022. Revenues from service as a percentage of total revenue was 64.1%, up from 62.5% during the same period of 2022.

During the second quarter of 2023, as a percentage of our total revenue, Japan contributed 43%, North America contributed 29.5%, Mainland China contributed 11.6%, and other countries in the region contributed the remaining 15.9% as compared to 38.1%, 39.2%, 1.4%, and 21.3% in the same period of 2022, respectively.

The revenue from Mainland China increased significantly, primarily due to the recovery of international travel from the Chinese tourists utilizing Roaming Man brand service. Overall gross margin was 44.9% in the second quarter of 2023 as compared to 44.1% in the same period of 2022. Gross margins on service was 58% in second quarter of 2023 as compared to 56.2% in the same period of 2022.

Excluding share-based compensations, total operating expenses were USD7.3 million or 33% of total revenue in the second quarter of 2023 as compared to USD7.3 million or 41% of the total revenue in the same period of 2022.

We narrowed net loss significantly to USD0.9 million in the second quarter of 2023 compared to a net loss of USD6.3 million in the second quarter of 2022. Adjusted EBITDA non-GAAP improved to USD2.1 million during the second quarter of 2023 as compared to negative USD1 million in the same period of 2022.

We achieved positive operating cash flow, USD3.4 million, during the second quarter of 2023 as compared to USD2.5 million during the same period of 2022. We successfully achieved positive cash flow from operation for a fifth consecutive quarter, accumulating operating cash flow of USD13.9 million through the five periods.

In the second quarter of 2023, we continued to improve our financial performance, and we believe that we are well positioned to execute on our growth initiatives.

With that, operator, please open up for Q&A.

(Operator Instructions) Theo O'Neill, Litchfield Hills Research.

Thank you very much. My first question is about product sales in the quarter. They were up sequentially from the first quarter quite a bit. Is there a particular reason for that strength in Q2 versus Q1?

So your question regarding the second-quarter revenues compared with the first quarter of this 2023, that's your --

Yes, but only for products, not services, just the product strength growth was strong in Q2 versus Q1. I was just wondering if there were something going on in Q2 for products that was different from Q1.

Yes. So I think two reasons that might have happened, one is because of COVID-19. It is all over the world, including China, Japan, Southeast Asia. So the first quarter, just -- for China, the fourth quarter just opening. So everything still is not a fast growth. And that's why the first reason is because COVID-19 is over. And the second is [worldwide of] our customers prepare for the summer season. So these two reasons [meant that] the equipment grows.

Okay. My next question is about the GPS-tracker-enabled portable terminal. Having the GPS tracker inside the terminal, is that to prevent theft or does the GPS info feed into the SIM card selection?

Sorry, can you repeat your question?

Yes. The GPS-tracker-enabled portable terminals. The GPS tracker in there, is that to prevent the terminal from being stolen? Or does the GPS -- the information from the GPS feed into the SIM card selection?

Yes. Let me answer. We just newly launched a new product in the second quarter. So I think it's a smaller volume launch, and you can -- it's very small, very tiny, about 40 grams. The weight is about -- like smaller than a business card. So it's convenient. It is smallest portable Wi-Fi and the market function with the GPS tracking SoS function.

So why we launched this kind of product is because we try to let people understand not only for connection, because our market network cloud SIM technology and HyperConn will enable people to get a faster coverage.

So this technology, not only we can apply into the connection for better connection, but also because of better connection, we can enable people to find lost goods much easier because we get better coverage on the lost -- all the GPS information is easily to be, via our 4G, sent back to the server and let the people find the lost material or the people who are lost and easy to SoS for -- to get -- ask help.

So that's the reason we are now expanding our business from a connection to the people who need better coverage and need these tracking and health requirements.

Thank you very much. That completes my question. Thank you.

(Operator Instructions) Vivian Zhang, Diamond Equity Research.

Hello, this is Vivian with Diamond Equity Research. Congratulations on the nice quarter. I have two questions for you. The first one is about the operating expenses, because in the quarter, the research and development expenses decreased by, like, over 36%, while sales and marketing expenses increased over 40%. So can you explain why this happens? Does this mean that the company's spending will be focused more on the marketing side?

Yes, you have -- the figures tell how we manage our headcount, relevant cost, and also the other -- the business-driven expenses as well. Yes, for INDs, we're managing tightly on the increased headcount. Even this year, we expect the business activity is increasing and the revenue will grow. We're managing this program and the tight cost control measures.

So the R&D's headcount is not increasing as the revenue growth expectations. But on other side, as you saw, our sales and market sector expenses, compared with the last-year period, is increasing. This came from two drivers; one is on the sales guide -- the headcount sales guide increases compared to last year.

As we explained in the PR, Roaming Man brand service contributes a lot of revenue for Chinese outbound tourists, so our headcount for the China maintenance business increases. But all this headcount increase is in our budget. And so that's reflecting our growth, and we control our budget in line with growth activities.

Yes, let me add two more comments. I think our Q2 major revenue still come from our traditional products but especially for our 5G product. That's quite popular because we are the only one currently launching 5G worldwide connection. This is quite popular and generates good revenue.

But more than the traditional product, in the second quarter, we launched three new products. That means our R&D capability is very stronger. So we can, in one quarter, launch three new products and this new product just end of the second quarter. And I think in the next two quarters and the next year will help us win more revenue and users.

These three products, I think, you can see, is about our GlocalMe SIM. First and second is our highly reliable CPE -- upgraded CPE and that then can enable enterprise office and home to get a highly reliable network to secure their fixed network, no drop for this after recovery. So the last one, we just launched the smallest card-sized checking and Wi-Fi product, and this product can go to the daily life of people.

So all these three new products, I think, demonstrate our R&D has a very strong capability. Even during the last painful years, we still can launch our new product in the second quarter. So I believe these new products I just mentioned in the following quarter and the next year will generate more revenue and users for us. Thank you.

Okay, I understand. So next question is that could you elaborate on the -- like what drove the company's revenue growth in China and your products and growth strategy there because I see the proportion of our revenue from China. It increased a lot this quarter. Can we expect this growth momentum to continue? Thank you.

Yes, as we disclosed the third-quarter guidance, the growth rate will be -- go to 30% around compared to that same period of 2022. We expect this peak season for summer holiday. And yes, same for Chinese outbound tourists.

So this summer holiday is the -- is peak time for this year. So we expect the growth momentum came from international travel, this pickup time. So that's the main -- still a driver for the gross revenue in the third quarter and also will contribute our improving -- our service gross margins and contribute to our strongest financial position in terms of operating cash flow and this adjusted net income.

Yes, so I'll still add more to comment. The first, we can see the report from the government. The first half year of China, outbound tourists only recovered 30%. So you can see it's smaller compared year -- before COVID-19, only 30% recovery. So people -- the government forecast during the next holiday, like National Day, we will go to the 50% around this figure, almost another bigger group.

Another reason we understand, because of the Visa issue and the passport issue during the COVID-19, so we haven't seen a big increase from the Chinese people. Even smaller percentage already give us a good revenue.

We believe that once the Visa problem and the passport problem and the opening of boundary become more -- this barrier is overcome, I believe in the third quarter and fourth quarter we will get a much better revenue from the China market for Roaming Man brand.

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

[Yanxin Li], Great Wall Securities.

This is from Great Wall Securities. And I have a question about the PaaS and SaaS rates because we see the revenue of this part doesn't have -- obviously increased compared to the first quarter. So I want to know maybe the process of the PaaS and SaaS service development at this time, yes.

Yes. Yes, so we -- in the second quarter of 2023, our service revenue segment increased significantly with a mix of three main types of service revenues: international roaming connectivity service, local connectivity service, and a PaaS/SaaS service.

Among the three categories, roaming service is the increase, number one, in terms of growth rate. And PaaS/SaaS is third place in terms of growth rate, but there's growth. As we report our daily active terminal in the second quarter, it reached a historical record high of over 310,000. So that's our foundation to reflect our growth. Foundation activity is growing.

Why is this PaaS/SaaS revenue growth rate is in the third place? It depends on our monetized business models. We have the three main business models: one is the B2C retail business model; and the thickest, B2B2C wholesale business model; and the third one, PaaS/SaaS platform.

So it depends if our business partners choose which business model is suitable for them. So you have people who choose B2B2C wholesale business model in roaming sectors. So we will have more roaming service generated from this commercial term.

And sometimes, we don't double charge wholesale packages to the partner and our PaaS/SaaS platform. But overall, our activity is growing in line of the growth total. And as we disclosed as well, we have launched three products in this quarter, GlocalMe SIM card and this smallest Wi-Fi -- portable Wi-Fi with the GPC track function and IoT modules delivered to a main operator of the mobile network operator in Japan.

So these IoT module deliveries, most will generate more PaaS/SaaS service in the future to our account. And for these other functions, like GPS, GPS tracker, will also generate its platform service -- PaaS/SaaS service to account as well in the future. So the momentum for PaaS/SaaS revenue growth is still strong. But we manage our performance in terms of overall -- of three main categories of service sector.

Yes. I think because we launched new product and the new service, I think we are expecting our PaaS/SaaS revenue not on where traditional is coming from, connection services and the data volume. But now with expansion to the new area, like I just mentioned GPS tracking, high resolution, and high availability tracking -- so that's our unique services, also in the future about SOS in the high percentage for emergency services.

So all these types of -- also like highly reliable CPE -- high-level CPE, highly reliable [router], even the data usage is quite smaller, but people buy for emergency.

So they buy for, I think -- like insurance for the high-quality commission. I believe these kinds of services, [more be aware] by the people, more easy understanding rather than the connection, and these types of services will generate more PaaS and SaaS services revenue in the future.

Yes, I got it. Okay. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Jillian Zeng for 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 IR relations firm, the Equity Group. We'll look forward to speaking to you all again on our next quarter. Thank you.

Thank you.

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