uCloudlink Starts U.S. IPO Process (Pending:UCL)

Quick Take

uCloudlink Group (UCL) has filed to raise $50 million in an IPO of its ADSs representing Class A shares, according to an F-1 registration statement.

The firm has developed a marketplace to enable mobile network operators to connect and share data.

UCL has grown smartly and is profitable and generating free cash flow.

I’ll provide a final opinion when we learn more about the IPO from management.

Company & Technology

Hong Kong-based uCloudlink was founded to operate an online marketplace to connect mobile carriers to connect and share data at the country and carrier level.

Management is headed by founder and Chief Executive Officer Mr. Chaohui Chen, who has been with the firm since and was previously SVP at Huawei and an R&D engineer before that.

Below is a brief interview video:

Source: World Travel Market London

The firm aggregates mobile data traffic allowances via mobile network operators in 144 countries using its cloud SIM architecture.

Data shares reached 90,600 terabytes in calendar year 2019.

uCloudlink has received at least $141.8 million from investors, including MediaPlay, AlphaGo Robot, Haitong, and Beijing CASH Capital Venture Partners.

Customer/User Acquisition

The company provides its service offerings through smartphone manufacturers as well as through the GlocalMe World Phone series aimed at frequent travelers.

Sales and marketing expenses as a percentage of total revenue have dropped markedly as revenues have increased, as the figures below indicate:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

2019

15.4%

2018

23.5%

Source: Company registration statement

The sales and marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales and marketing spend, was 1.3x in the most recent reporting period.

Market & Competition

According to a 2016 market research report referenced by i-SCOOP, the market for mobile data is expected to grow by a factor of 12 between 2015 and 2021.

Monthly data traffic per smartphone is expected to grow most sharply in the western regions of North America and Western Europe, as the chart shows below:

The main drivers for this expected growth are the increase in the viewing of video over mobile devices as well as the continued growth of social networking.

Ericsson (NASDAQ:ERIC) expects smartphone shipments to increase from 1.48 billion in 2016 to 1.84 billion by 2020.

Financial Performance

uCloudlink’s recent financial results can be summarized as follows:

  • Growing topline revenue

  • Increased gross profit and gross margin

  • A swing to positive operating profit

  • A swing to positive cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2019

$ 158,381,000

25.3%

2018

$ 126,399,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

2019

$ 64,918,000

40.7%

2018

$ 46,155,000

Gross Margin

Period

Gross Margin

2019

40.99%

2018

36.52%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

2019

$ 5,509,000

3.5%

2018

$ (23,165,000)

-18.3%

Comprehensive Income (Loss)

Period

Comprehensive Income (Loss)

2019

$ 5,239,000

2018

$ (26,020,000)

Cash Flow From Operations

Period

Cash Flow From Operations

2019

$ 5,761,000

2018

$ (19,472,000)

Source: Company registration statement

As of December 31, 2019, uCloudlink had $40.5 million in cash and $47.7 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was $3.2 million.

IPO Details

uCloudlink intends to raise $50 million in gross proceeds from an IPO of its ADSs representing Class A shares, although the final amount may differ.

The company founder and company chairman together will own all Class B shares and will be entitled to 15 votes per share versus one vote per share for Class A shareholders.

The S&P 500 Index no longer admits firms with multiple share classes into its index.

Management says it will use the net proceeds from the IPO as follows:

for research and development; for general corporate purposes, which may include funding sales and marketing efforts, working capital needs; and for potential strategic investments and acquisitions, although we have not identified any specific investments or acquisition opportunities.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are I-Bankers Securities, Valuable Capital Limited, Tiger Brokers, and Loop Capital Markets.

Commentary

uCloudlink is seeking U.S. capital investment for its international expansion plans.

The firm’s financials indicate it is growing topline revenue while crossing net breakeven and producing free cash flow.

Sales and marketing expenses have dropped as a percentage of revenue; its sales and marketing efficiency rate is 1.3x.

The market opportunity for sharing mobile data would seem to be rather large, especially as the demand for mobile data is forecasted to grow at such an intense rate over the near term.

The key for the company is its ability to get its technology included in smartphones at the manufacturing level.

The firm has certainly innovated by enabling smartphone users to seamlessly access other local mobile networks outside their contracted provider.

The risk is that the MNO industry comes up with a solution of their own, as why share profits with an outside service provider?

I’ll provide a final update when we learn more IPO details from management.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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