uCloudlink Group Inc. (NASDAQ:UCL) Q4 2021 Earnings Conference Call March 24, 2022 8:30 AM ET
Company Participants
Jillian Zeng – Investor Relations
Chaohui Chen – Co-Founder and Chief Executive Officer
Yimeng Shi – Chief Financial Officer
Conference Call Participants
Lisa Thompson – Zacks Investment Research, Inc.
Vivian Zhang – Diamond Equity Research LLC
Jakob Kurtz – Greenridge Global LLC
Operator
Good morning and good evening, ladies and gentlemen. Thank you for standing by, and welcome to uCloudlink Group Incorporated Fourth Quarter and Full-Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After prepared remarks by the management team, there will be a question-and-answer session. Today’s conference call is being recorded.
I would now like to turn the conference call over to your host today, Ms. Jillian Zeng, Investor Relations of the Company. Please go ahead.
Jillian Zeng
Thanks, everyone, for joining us on our fourth quarter and full-year 2021 earnings call today. This earnings release is now available on our IR website at ir.ucloudlink.com as well as via newswire services. I will give a brief introduction to our uCloudlink team.
Zhiping Peng is our Co-Founder and Chairman of Board of the 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 the 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 on our IR website. Our CFO, Yimeng Shi will then discuss our operation 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 Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and observations that involve the known and unknown risks, uncertainties and other facts 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 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.
Chaohui Chen
Yes, thank you. There are similar content as the earnings presentation of the third quarter of year 2021. I will focus on our technology and recent development.
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. We have established an intelligent wholesale-to-retail repackaging solution to minimize unit cost of data traffic, in that as data package of single operator or across mobile network operators, mobile virtual operators are priced differently.
This is attributable to our large SIM card pool and our ability to acquire data packages at local wholesale prices from operators and partners. We further differentiate ourselves with our multi-network reselection and combination technologies, which could ensure high-quality data connectivity and improve user experience.
uCloudlink 1.0 business monetization model includes retail to C, rental or selling to the end user; wholesale to B, business partners; and our PaaS and SaaS services, such as CRM, billing management, devices selling and rental management, et cetera. For wholesale to B, we can act as a reseller or provide commission services to our business partners. We allowed our business partners to share data traffic pools through our PaaS and SaaS platform and charge a commission fee.
In year 2021, we strive to accelerate the recovery of our 1.0 business, which was reflected in the positive trends in the daily active terminals called DAT of 1.0 business growth, as the number of international travelers increased in various markets and our 1.0 business revenue increased in the third quarter of year 2021 year-over-year.
The revenues of our 1.0 business in our North American and Europe market increased during the first quarter of year 2021 year-over-year. Although the total revenues from the same line of the business experienced a year-over-year decrease in the same period due to the impact of the COVID-19 virus. Despite the impact the pandemic has had on our 1.0 business, it has also created opportunities for potential growth, including the demand for mobile data related to travel, tracking, vaccination records, digital passports, and COVID test report. We also anticipate that we will see fewer competitors in the post-pandemic market, but we could not assure you that 1.0 business will now be negatively impacted by COVID-19 pandemic in year 2022.
We remain confident in the prospects for international travel with the worldwide vaccination continuing to progress and more and more countries opening their borders to tourists in year 2022 and beyond. With that, I would like to reiterate our vision for the 1.0 international data connectivity business. Our plan is to not only continue providing existing high-quality 1.0 offering, but to size big market share with the development of more innovative products and services.
Let’s move to the Page 14. uCloudlink 2.0 is our local data connectivity services business and has become a new driver of revenue growth since the year 2020. This business monetization model is similar to that of the uCloudlink 1.0 with a massive potential local user base.
Our new HyperConn technology contributed to the further development and the growth of our uCloudlink 2.0 business, and we have expanded the business scope of our local data connectivity services. Currently, our innovative HyperConn technology is widely accepted by mobile network operators and business partners in various industries with greater growth potential, such as with local partners in China, U.S. and Japan.
Our 2.0 business shows a greater deal of resilience with proven high demand and growth potential during the pandemic. We help operators improve their data services and solve the data connection problems through our PaaS and SaaS platform. We provide high-quality data connection for 5G applications in response to the increased demand for better connectivity services.
Furthermore, as people get used to the new normal, our product and services provide better performing solutions for remote work and learning, which require reliable connectivity as well. For example, our new tablets equipped with HyperConn and Cloud SIM technology has been put to use in new industries such as education. We have made progress through HyperConn solution with mobile and fixed broadband business under various application scenarios such as home broadband. For example, our mobile and fixed broadband business cooperation with one of our major network operator in China has been successfully launched and distributed to more provinces.
We also plan to invest more GlocalMe Inside, we call, GMI in smart device by cooperating with more intelligent hardware manufacturers. In addition, we have extended our footprint into a more application scenario, including but not limited to Internet of Things, IoT modules; industry Wi-Fi routers; IP Camera; Power price; emergency services; live broadcasting e-commerce and Autopilot, et cetera, and are actively exploring new business prospects to serve a broader spectrum of IoT applications.
We expect our 2.0 business to grow with the support of our innovative Cloud SIM and HyperConn technology as we continue to introduce our solutions, services and products to the market and strengthen our cooperation with the local partners.
Let’s move to the Page 15. Based on our innovative Cloud SIM and HyperConn technology solution, we continue to develop and broaden our portfolio of offerings with new products and services, such as our self-developed terminals and third-party devices. For example, after we unveiled our new HyperConn technology and products in June of year 2021, we launched these solution and products to the markets in the second half of year 2021, such as Numen, the world’s first HyperConn 5G mobile Wi-Fi and Genie, a tablet device in the third quarter of the year 2021 and Mini Turbo, portable Wi-Fi Hotspot equipped with HyperConn in the fourth quarter of the year 2021.
Our IP Camera, IPC has completed testing and expected to launch commercially soon. Our HyperConn technology solution has been well received and related products are gaining recognition proven by growing user base across a wide spectrum of industries. Going forward, we plan to launch more of these types of innovative products and services. uCloudlink positions itself as a pioneer technology solution provider in the data connectivity market. In year 2021, we made a priority to invest in research and development, most notably in technologies like Cloud SIM and HyperConn that are compatible with various application scenarios, both of which greatly reinforce our technology advantages.
Our mature 1.0 business and newer 2.0 business will together promote the long-term development of the PaaS and SaaS ecosystem, which has been recognized by various business partners. As stated in our earnings release, we anticipate growing total revenue for full-year of year 2022 by 15% to 35% to a range between US$85 million to US$100 million versus total revenue of year of the US$73.8 million in year 2021.
The company expects to improve financial covenants with the support of our commercialized HyperConn technology and related 5G product, the continuous business expansion of our existing portfolio of diverse IoT application scenario as well as the ongoing efficient improvement strategy implemented since the quarter four of the year 2001 to reduce operating expense.
We believe that from the connected to better connections, uCloudlink is a significant driving force in the transformation of the increasingly advanced information era. We are committed to build a more connected future 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.
Yimeng Shi
Thank you, Mr. Chen. Hello, everyone. Let us turn to Page 17 for our business highlights. The left-hand side of the slide shows Daily Active Terminals, DAT, as of December 31, 2021. Average daily active terminals in the fourth quarter were 265,595 including 1,585 owned by the company and 264,010 owned by our business partners, representing an increase of 28.7% from 206,400 in the fourth quarter of 2020. Our uCloudlink 2.0 service accounted for around 69% of the total DAT during the fourth quarter of 2021. Average daily data usage per terminal was 1.73 gigabytes in December 2021.
Let us turn to Page 18 which shows global diversification of our business. We had 97% of the total revenue from outside Mainland China. During the fourth quarter 2021, Japan contributed to 37% of the total revenue. For other countries’ revenue, the U.S. market had the largest contribution to our business with further development of our U.S. business and we will continue to expand other markets such as Japan, China, Europe and South East Asia, et cetera. During the fourth quarter of 2020, we had 5% of total revenue coming from Mainland China, 47% of the total revenue coming from Japan and 48% of total revenue coming from other countries and regions.
Let us turn to Page 20. I will go through our financial highlights of the fourth quarter 2021. Service-related revenue as a percentage of total revenue was 54.8% during the fourth quarter of 2021 compared with 52.9% during the fourth quarter of 2020. Revenues from PaaS and SaaS services increased 43.5% from US$1.9 million in the fourth quarter of 2020 to US$2.7 million in the fourth quarter of 2021. This increase was primarily due to the expansion in the number of our business partners that use our PaaS and SaaS services to provide local data connectivity services. Revenues from PaaS and SaaS as a percentage of total revenue also increased to 15.2% during the fourth quarter of 2021 compared with 10.9% during the fourth quarter of 2020.
Let us move to Page 21 which shows the revenue breakdown of our two business segments, namely revenue from services and sales of products. Our total revenue increased by 3.2% from US$17 million in the fourth quarter of 2020 to US$17.6 million in the fourth quarter of 2021. Revenue from services were US$9.6 million, representing an increase of 6.8% from US$9 million for the same period of 2020. This increase was primarily attributable to increase in revenues from local data connectivity service and PaaS and SaaS service.
Let us turn to Page 22 for the gross margins of our business. Our service gross margin increased to 46.1% in the fourth quarter of 2021 compared to 41.2% in the fourth quarter of 2020, and our overall gross margin was 31% in the fourth quarter of 2021 compared to 31.4% during the same period 2020. The increase of our service gross margin during the fourth quarter of 2021 was primarily due to the increase of our PaaS and SaaS revenue, which has highest gross margins over other business revenue.
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 62% in the fourth quarter of 2021 compared with 83% during the fourth quarter of 2020. The past few years have been a peak time for research and development, and we will optimize the research and development cycle and continue to improve our operation efficiency of our business.
Let’s all turn to Page 24. Operating cash flow was negative US$3.2 million during the fourth quarter of 2021 compared to negative US$5.5 million during the fourth quarter of 2020. Our cash and cash equivalents and short-term deposits were US$8.8 million as at December 31, 2021. Our CapEx was US$0.2 million during the fourth quarter of 2021 compared to US$0.4 million during the fourth quarter of 2020. CapEx as percentage to the revenue decreased from 2.2% during the fourth quarter of 2020 to 1.3% during the fourth quarter of 2020.
Let’s all move to Page 25. Net loss during the fourth quarter of 2021 was US$15.5 million compared to US$12.4 million during the fourth quarter of 2020. Adjusted EBITDA was negative US$5.1 million during the first quarter of 2021 compared to negative US$7.9 million during the fourth quarter of 2020.
With that, let me conclude today’s presentations. Thank you, and we will start our Q&A session.
Question-and-Answer Session
Operator
Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Lisa Thompson from Zacks Investment Research. Please go ahead with your question.
Lisa Thompson
Hi, good evening. Thank you for that presentation. So I have a number of questions about the quarter. First, could you just tell us what’s the current fully diluted share count now that you have a convert?
Yimeng Shi
Hi, Lisa, can you repeat the question?
Lisa Thompson
Yes. What’s the current fully diluted share count now that you’ve issued a convert?
Yimeng Shi
Yes, we will disclose that convert – that diluted shares taking into account this convertible debenture issues in this January. So that figure will be disclosed in the first quarter only released this year.
Lisa Thompson
Okay. So this is the number. All right, as far as cash burn, where are you now? Is it $1 million a month or less than that?
Yimeng Shi
In the fourth quarter of 2021, we bond US$3.2 million for operational cash flow. As of December 31, 2020, the company had cash and cash equivalent and short-term deposits, US$8.1 million and short-term investment at US$12.6 million. So in January 2022, the company completed an insurance of a convertible debenture through private placement with proceeds of US$4.7 million based on the company’s projection of cash flow and the existing balance cash, cash equivalents, short-term deposits and short-term investment.
I think the company’s – companies have a sufficient fund for sustainable operations. And the company has – this take measures to successfully execute its business plan, which includes increasing revenue while controlling operating expenses to generate positive operating cash flow and obtaining from external sources as well. So we expect the cash burn rate will be improving this year materially. And so we expect into our guidance and others, we were managing the cash flows in healthy position for this year.
Lisa Thompson
So do you think you’ll get to cash flow breakeven by the end of the year?
Yimeng Shi
That’s what we are expecting, and we will achieve – management will be – take efforts to achieve that target.
Lisa Thompson
All right. As far as the income statement, could you say what was that $8.7 million in other expense? What caused that?
Yimeng Shi
You mean the breakdown of the operating expenses?
Lisa Thompson
Right.
Yimeng Shi
Hi, Lisa. Can you repeat?
Lisa Thompson
Yes. What’s in that number? What’s in the number, the $8.7 million? What’s in there?
Yimeng Shi
$8.1 million cash balance, right?
Lisa Thompson
No, $8.7 million other income on the income statement? Under general and administrative, right, there’s $8.7 million in expense?
Yimeng Shi
Lisa, can we have [indiscernible] for these figures after this call. Is that okay?
Lisa Thompson
Okay. It’s not an easy answer. So also could you give an update on – do you still have the education order for tablets in Japan, or has that been canceled? And when might that start?
Yimeng Shi
Can I pass the question to Mr. Yeo, or Chaohui Chen to answer the question?
Lisa Thompson
Okay.
Chaohui Chen
You asked about the pad contract in Japan, right?
Yimeng Shi
So can you repeat your question? Yes, it’s about pad in Japan, right?
Lisa Thompson
Yes.
Yimeng Shi
Yes. The pad order in Japan is still going on. But because the school in Japan, it’s a face-to-face education, restart again. So the speed is a little bit slowly than our expectation, but still going on.
Lisa Thompson
Okay. And is there an explanation for why revenues in Japan are declining?
Yimeng Shi
Yes, I think it’s clear because – of course, when the COVID-19 happened, because local requirement is huge. But because face-to-face meeting, because in year 2021, the Q2, Q3 and recovery, and the Q4 because COVID-19 virus, still become worse again. But before that because of the pandemic getting [indiscernible] because of the vaccination, because of the new medicine come out. So face-to-face meeting and face-to-face education and remote working. So decrease in Japan that, that domestic 2.0 a little bit decreasing.
Lisa Thompson
Okay. And my final question is, are there any more products you plan to launch soon?
Yimeng Shi
Yes. Yes, you can see that we have – we have [indiscernible], Numen, which is the fourth – 5G product, the workforce 5G with the HyperConn solution, that can switch between Wi-Fi, all the 5G, 4G order network. So this launch in the third quarter. And because the [radio band] only with Asia and the Europe radio band, we don’t have global radio band at the moment. And recently, we launched our new product, we call U 5.0 with global radio band and a more competitive price and to accelerate the 5G key product launch. That’s one part.
And the second part we have more, like a CPE IoT module with HyperConn inside. So we are launching – as I mentioned in the fourth quarter, we finished testing for more IoT products such as industry router. So we launched in the fourth quarter of year 2022. And a new module, more competitive module we launched in the year 2000 – the fourth quarter of year 2022.
And also, we have IP camera product launched in the fourth quarter of year 2021. That’s more product come up, including the 5G, including more IoT products. And also, we have more HyperConn product into our international roaming Wi-Fi as well.
Lisa Thompson
All right. Great. That’s something to look forward to. Thank you. That’s all my questions.
Operator
And our next question comes from Vivian Zhang from Diamond Equity.
Vivian Zhang
Hello, everyone. Thanks for taking my questions. So we see the company maintained topline growth during the second half of last year, with [indiscernible] partnership, with business partners and the PaaS and SaaS business growing. So we’d like to know why the company instead of 4% to 21% year-over-year decrease in first quarter 2022 revenue. What’s the main reason for the decrease in outlook?
Yimeng Shi
The guidance for the first quarter of this year, 2022, that range is between $40 million to $17 million. That’s a decrease compared with the last year’s – the first quarter of 2021. Yes, as we said it, there’s the COVID-19 have an impact on the supply chain, not in this quarter, the first quarter’s, some lockdown occurred in China, in Shenzhen and Dongguan, on these kind of areas. And that gives us some difficulty for manufacture and delivery with some orders at hand. And that’s some reason that we’re aware recently. So we have – we expect the first quarter – the first quarter guidance a little bit dropping compared with last years. Yes, that’s. Mr. Chen, do you have some color on this first quarter guidance decreasing?
Chaohui Chen
Yes. So mainly is because of two reasons. One is because of Omicron, COVID-19 virus. And the second is because of the lockdown in China, in Shenzhen and in Dongguan, that’s our manufacturer base. That’s heavily impacted our revenue. So by the fourth quarter, but we believe in the second quarter because of more country open and variant – COVID-19 variant impact will be decreasing.
Vivian Zhang
Okay. I understand. So my second question is regarding your ongoing restructuring. Can you provide some additional color on why the company adjusted the revenue structure and the local business in China? And will this affect the company’s future revenue in China as well? Thanks.
Yimeng Shi
Yes. As we disclosed this year out, we continue to evaluate our business plan, and we have decided to adjust our business model in China, yes. So on March 17, 2022, the equities of the AE was transferred to the Shenzhen uCloudlink Technology Limited. An original agreement were terminated. So we believe this restructuring will not affect our uCloudlink 1.0 international data connectivity service in China. So we will transfer and carry out the PaaS and SaaS platform service China in cooperation with the local business partner such as we invested Beijing Huaxiang Lianxin Technology, which have the required license to provide local data connectivity service in China. So that’s – we adjusted the model in China as similar as we, in Japan. So you can see our PaaS/SaaS ecosystem and our PaaS/SaaS service apply to corporate, with a local partner as either in Japan, in China, other regions of the world.
So that’s – we adjusted this model to execute PaaS/SaaS platform-centric with a business model and strategies as well. So that’s – I think this is a key reason. We adjust the varying models in China. I think this gives us more secure position in compliance and operation as well. And it give us position incorporated with a local partner to do the business in local market.
Vivian Zhang
Okay. That’s all my questions. Thanks.
Operator
And ladies and gentlemen, at this time I’m showing no additional questions. I’d like to turn the floor back over to management for any closing remarks.
Jillian Zeng
Thank you once again for joining us today. If you have further questions, please feel free to contact uCloudlink Investor Relations through our contact information provided on our webcast or Equity Group Investor Relations.
Operator
And ladies and gentlemen, I apologize. This is the conference operator. We do have a late joining question from Jakob Kurtz from Greenridge Global. Jakob, please go ahead with your question.
Jakob Kurtz
Hi. So daily active terminals continued to increase in the current quarter, but total data consumed slipped compared to the third quarter. Should we expect to see both numbers rise over the course of 2022?
Yimeng Shi
This data consumers per daily active terminal will be a change in terms of this package selling the mix and different target policy that the customers choose. So that’s a change in its statistic figure. So we cannot accurately expect forecast, this data consumers per daily active terminal will be increasing somehow. We don’t know this – we cannot give this – the clear color on this – with this kind of consumption, this average daily terminal.
Jakob Kurtz
Okay. And then my next question, assuming travel restrictions stay roughly similar to what they are now in China for the remainder of 2022, what percent of total revenue do you expect from 1.0 and 2.0?
Yimeng Shi
Specifically you mentioned these revenues from China, Mainland China?
Jakob Kurtz
Sorry, what was that?
Yimeng Shi
All right. Can you clarify your question?
Jakob Kurtz
Assuming travel restrictions stay similar to what they are currently in China for the remainder of the year, what percent of total revenue do you think 1.0 and 2.0 will account for by the end of the year?
Yimeng Shi
Yes, this COVID restrictions is still implemented in China, across city and something. So the Chinese – the border has not been open to the outside. We don’t know when the Chinese will open to the outside this year. But we do expect there’s – the border has been opened and lift up in U.S., European and some Asian countries like Japan, Singapore, some other Asian countries as well.
So as you’re aware, we run our business as across worldwide, we have a diversification business for more than 50 countries and the regions. So yes, China’s contributions is smaller at this moment. The risk outside the China Mainland is – when there’s international travel has been recovered due to this opening up the borders. So we expect that we have the international connected service will be improving outside of China this year. Yes, that will give us a growth and improve our profitability as well for this year.
Chaohui Chen
Yes. I have some more comment from the [indiscernible]. So for – in the China market, so we don’t expect 1.0 business recovery because we think maybe end of this year or next year, we started – opened the border of China. That’s our forecast in the worst case. We don’t think that will happen in China for – open the whole year. So that’s one. So in China, we are mainly focused on – 2.0 business and IoT business. So that’s in China.
So for international business, so we only know – not very opportune data. For example, we don’t think under the COVID-19 impact – so what case, we don’t think we’ll open really quickly. We start to think in Q2, some countries opened the border of the country. But majorly of the outside China countries will be starting on the Q3 or Q4 to open the country. That’s our assumption.
Jakob Kurtz
Okay. And then my next question, the markets outside of China and Japan have been showing strong growth recently. Are there any countries or regions driving this? And do you expect to see growth continue to be faster in these regions?
Chaohui Chen
Yes. So once we sought in the two pronged challenges, one is about the regulation challenge and also for the IoT. And also the recovery of 1.0 in China, we believe we will regain the fast growth in China.
Yimeng Shi
For others, the potential to fast growth, we expect that Japan’s market and the U.S. market and European markets is – will be the main growth in the business for this year.
Jakob Kurtz
Okay, awesome. And then last question. Was the settlement with CMO Holdings completed?
Chaohui Chen
Sorry, can you repeat?
Jakob Kurtz
Was the settlement with CMO Holdings completed?
Yimeng Shi
That was – yes, that was last year. So we launched the agreement last year. And so it’s peaceful, no more mediations between [indiscernible].
Jakob Kurtz
Okay. Thank you. I appreciate it. That’s all.
Yimeng Shi
Thank you.
Operator
And ladies and gentlemen, with that, we will conclude today’s question-and-answer session and conference call. We do thank you for attending today’s presentation. You may now disconnect your lines.
Yimeng Shi
Thank you.
Chaohui Chen
Thank you.
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